by Tyler Cowen
on April 1, 2014 at 2:32 am
in Economics |
I still want to see an economist reconcile a belief in secular stagnation with a belief in Piketty’s claim that the return on capital is going to exceed the growth rate of the economy on a secular basis.
That is from Arnold Kling.
It’s hard to take anything Arnold writes about stock returns seriously, since he insists on only considering models in which stocks never pay any dividends.
I agree with ed that Arnold has a blind spot here. The total return to capital could be significantly higher than GDP growth, and usually is. But, over the long term, if production isn’t growing, the dividends would need to be consumed, or the price of productive assets would be bid up only as a product of lower expected returns (price being the inverse of yield). So, there would still be the question of how exactly the concentration of capital would play out.
That’s an interesting story to think about if we can get past this silly argument about whether capital can earn higher returns than the growth rate of the economy.
Compensation as a % of GDI, as measured by the BEA, has come down slightly from its peak, but this is as much from growing consumption of fixed capital as it is from operating surplus. If it takes more capital to earn the same absolute level of returns, is that a concentration of wealth? The market value of the assets is higher, but the consumption they earn you is the same.
The baby boomers all need to have income in 30 years, when they are 90 years old. Those $100 bonds they bought at face value, paying $5 coupons are now worth $150. But, when they are 90, they will still be getting that same $5. Is inequality worse because those bonds have a market price 50% higher while they collect those $5 payments?
At the risk of sounding Stovian, the deliberate confusion of terms is a problem here. Capital is not simply the current value of the DOW. That’s not a very good proxy for the stock of capital. I have not read Piketty, but I suspect he does the sort of rhetorical slight of hand that dilutes the meaning of well understood terms like “capital” in order to avoid addressing what appears to be an inherent logic problem.
His sleight of hand is a little different – he asserts that r remains higher than g even as the capital-labour ratio increases. Rich people want to store wealth in excess of their planned consumption of output, for inheritance purposes. Maybe that’s so, but he never provides a theoretical argument as such; he waves a hand at the historical record and plausibility and that’s it.
Shiller not only has data on housing prices but return on stocks and bonds since 1871. They shows that the average real return on the stock with dividends reinvested has been over 6% for almost 150 years but the S%P price index growth rate was nearly equal the GDP per capita growth rate. http://visualizingeconomics.com/blog/2011/03/10/growth-of-gdp-per-capita-vs-stock-prices-since-1871 You can see the numbers here http://www.econ.yale.edu/~shiller/data.htm
Well, he conceded that he was wrong, which means he will now be kicked off the Internet.
If you read the post, you’ll see he conceded something, but continued to miss the main point and make claims that only work if you assume firms never pay out any of their profits.
An agricultural manor economy has an approximately zero percent long-term rate of growth, but the real rate of return on the manor’s land is still positive.
But such an economy cannot feature “runaway income inequality”.
Yes it can: the larger your land, the more weather shocks you can survive, and that diversification earns you a premium that you can use to acquire more land; freeholders became serfs in this way. The limitation on the size of one’s manor would be military considerations, not economic ones.
There are always limits to runaway income inequality. In the manorial economy, you might have 90% of the population living at the very edge of subsistence with high child mortality as a result of malnutrition and living conditions, perhaps 5% employed in skilled trades like black smithing, over seers or masonry with a more comfortable existence, another 4% as knights and clerics having an even better standard of living and the top 1% having most of the income for themselves. That is probably the limit of income inequality. In that economy there would be, as David notes, zero growth but positive returns to land (and to investment in things like ships, waterwheels, and dams)
Depends what you mean by “runaway.” Even in Piketty’s model, I believe from his presentation slides the prediction is simply higher steady state inequality, not ever-increasing inequality. (Although the reviewers seem very confused on this issue, and I haven’t read the book.)
Why would anyone want to reconcile something said by Piketty?
I realize we live in the real world, and that we can’t simply *wish* evil away, but surely polite society needn’t take the politics of resentment and thievery as something to be “reconciled” with proper theories.
Clearly because many people believe both Piketty and secular stagnation. If you believe one or none, there is no conflict. It is believing in both he has trouble with.
Literally the politics of thievery and resentment.
And regarding “plots” versus “spontaneous order”:
Do you really think that Piketty came upon his theories spontaneously? Do you really think that he’d follow any research to it’s conclusion which did not justify certain favored policies?
This of course is not only true of Piketty, and it’s unfair for me to pick on him here. We’re all guilty of only following research which supports our preferred policies.
We’re all guilty of plotting, at least sometimes.
At least Picketty provided all the data and created a website to open them to anyone.
That’s what is wonderful with science (even weak sciences like economics), every one can test the hypothesis and check how much mood affiliation there is.
It’s all 100% mood affiliation.
You saying it is 100% mood affiliation without thouroughly checking the data, isn’t it mood affiliation?
He acknowledges this by calling it “*Capital* in the 21st Century”, and his introduction explicitly places his analysis as the step after Marx.
Furthermore, there’s no such thing as “following research to a conclusion” that doesn’t match a hypothesis. You either invalidate your hypothesis (and go and find a new hypothesis), or you find corroborating evidence. You can’t perform research in the absence of a hypothesis.
You know, I’m reminded a throwaway comment Mark Blyth made in The History of a Dangerous Idea; in economics conservative ideas are seen as “neutral” but all our hypothesis are informed by our politics.
It seems the wealthy are the resentful of their ‘just deserts’ being recognized as thievery.
Why not save time and simply type “all rents are sacred”?
Luddite agitators, abroad in the streets, burning the looms;
returns on the surviving capital rise alongside the flames:
You had me counting syllable there, but alas, you were not writing Haiku.
abroad, gathered in the streets
burning the looms
rises alongside the red flames
But I think your version scans better.
Doesn’t the capital just find more ways to seek rent?
I thought the whole point behind sec stag was that growth rates would go down to zero, and doesn’t really say much on the return to capital per se. And not so much “down to zero” but more “below a rate we find out present social contract tenable”.
So, these seem like perfectly compatible views unless I’m missing something – but I’m still getting through Piketty.
How can the return on capital exceed the growth rate on a “secular basis”? It’s true that Piketty makes much of r > g, but Piketty also assumes that whatever financial crises occur will be met with the same government and central bank counter-measures that were adopted in 2008-09. I disagree with that assumption. But I also disagree with the emphasis on r > g. What catapults inequality is a sustained period of inequality in come from wages (i.e., now) that feeds inequality in income from capital (those receiving most of the wages become the owners of capital and the income that capital generates); it’s the inequality in income and wealth attributable to the disproportionate and growing share of income from capital that drives the self-sustaining and increasing inequality that ultimately leads to social and economic instability. In my view, Piketty is way too sanguine about the response of governments and central banks to financial crises. Piketty, being European, looks back into history and sees the physical destruction of capital (in the two wars of the 20th century) as the corrective to excessive inequality. Americans, on the other hand, have the experience of the destruction in the value of capital (not its physical destruction) as the corrective to excessive inequality. I suppose r > g seems more scholarly than pitchforks. Besides, it’s just as easy to see periods of low rates of return on capital as fueling excessive speculation, resulting in bubbles and the financial crises that have become common.
It wouldn’t be that difficult to do so. Rising inequality drives growth to zero and creates stagnation in the process as it becomes less and less attractive to invest in anything. This is a dynamic rather than static solution since both growth and return are driven to zero but growth is driven to zero faster. When a new innovation occurs, it increases return and growth temporarily before continuing to decline.
Just a speculative question.
Since the early 1980′s business investment in information technology has grown much faster than traditional capital spending..
Consequently, the life span of the stock of capital has fallen sharply so by now a much larger share of new investment is just to replace old equipment that has become obsolete. Because of this the level of net investment is now significantly lower than gross investment.
Can this create a situation where the return on capital exceeds the growth of the economy?
I do not know and my WAG –Wild Ass Guess — is that it causes just the opposite.
The cycle to replace bridges, water distribution pipes, water treatment plants, coal power plants, levies, et al has shortened since 1980 because of technology??
Or has the idea of capitalism shifted from sacrificing labor for consumption in order to devote labor to build capital assets for a better long term has been replaced in favor of pillage and plunder of capital to “liberate wealth”. Reagan made free lunch economics respectable. Create wealth by slashing wages (but not prices) and then lending the profits to the workers so they can get rich by using borrowed money to fund increased consumption.
Before 1980, debt in both the public and private sector was considered at best a necessary evil, and that the ideal was to be totally debt free. Since 1980, debt is the path to wealth. Donald Trump has been seen as a hero of many because he has repeatedly gone in debt over his head, gotten a Federal government bailout that redistributed other people’s money to his control (bankruptcy), and then repeated borrowing money he could not repay building capital assets that had less than zero returns, getting rich in the process.
Perhaps a silly question, but if no one asks this kind of question then most people are left behind …
Can someone please explain to me what “secular” means in this context? I don’t quite understand what the question means, but it seems like it might be an interesting one.
In this context it means, “long-term.” In other words, those who expect secular stagnation expect things to be stagnant for a long time and for the stagnation “signal” to dominate any short-term perturbations.
For more, see: http://en.wikipedia.org/wiki/Secular_variation.
Branko Milanovic has a good discussion of this question in his review: http://mpra.ub.uni-muenchen.de/52384/1/MPRA_paper_52384.pdf
It seems Piketty’s argument is primarily based on marshaling a great deal of evidence to the effect that r has been remarkably constant over history, under very different regimes of capital stock vs income and of overall growth. He tends to prefer empirical evidence to model-driven conclusions.
I’d like to see Kling argue that mountain top removal valley fill coal mining increases the capital value of the land over time.
I’d like Kling argue that slashing payroll and outsourcing everything to Asian enterprises has increased the capital value of Magnavox, GE consumer product divisions, RCA consumer products divisions, et al. Those were seen as great moves in the 80s because outsourcing cut costs and boosted profits and thus inflated the stock prices.
We have lots of returns to pillage and plunder, but zero returns to move real capital investment.
Zero returns to improving transportation infrastructure in the US.
Zero returns in improving water management infrastructure in the US.
Zero returns to improving the reliability of the electric grid in the US.
Zero returns to providing universal global leadership broadband in the US.
Even when public infrastructure is privatized, US investors refuse to invest in existing infrastructure because maintaining existing infrastructure has zero return to capital. The foreign corporations that have taken on capital assets like the Indiana Tollroad have defaulted on bonds because the returns to capital are too low.
The stock market is rising because of the increasing monopoly of capital assets and restricting any increase in supply of capital assets so that the scarcity of capital assets drives up the returns on existing assets.
Consider the absurdity of paying $19B for the labor of 23 people over five years; why not hire 100 workers for five years to build something that competes by using a billion in cash to buy customers. Why not create a web based SMS with signups rewarded with a $10 credit on your phone account and a $1 for every 1000 messages sent with it with the offer expiring when 50 million accounts are created and 500 billion messages sent?
The $19B was the price of monopoly control.
“I’d like to see Kling argue that mountain top removal valley fill coal mining increases the capital value of the land over time.”
Does it? It would be a very easy thing to prove or disprove. What’s the value of the land before and after the topping?
Turning heavily mountainous land into gently rolling hills may very well improve the value of the land over time. It’s agricultural value could go up, for example. It could make the land far more buildable. Who knows.
Evidently lots of people know:
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