More Matt Rognlie on Piketty — the most important point

by on June 13, 2014 at 9:45 am in Books, Economics, History, Uncategorized | Permalink

Matt has what is probably the single best, focused technical critique of Piketty.  Here are his concluding remarks:

Compared to the grand scope of Piketty (2014), the objective of this note has been quite narrow: to systematically explore the relevant evidence on diminishing returns to capital. Technical and uninspiring as this question may be, it is an essential step in knowing whether the prediction of rising capital income and inequality through accumulation—a prediction that gives Capital in the Twenty-First Century its title—will really come to pass. And given the evidence here that Piketty (2014) understates the role of diminishing returns, some skepticism is certainly in order.

But rejection of this specific mechanism does not constitute rejection of all Piketty (2014)’s themes. Inequality of labor income, for instance, is a very different issue—one that remains valid and important. Capital itself remains an important topic of study. Among large developed economies, the remarkably consistent trend toward rising capital values and income is undeniable. As Sections 3.3 and 3.4 establish, this trend is a story of rising capital prices and the ever greater cost of housing—not the secular accumulation emphasized in Capital — but it has distributional consequences all the same. Policymakers would do well to keep this in mind.

The full piece is here (pdf), excellent and on target throughout.

To be perfectly frank on this one, Matt here is completely correct and Piketty has not produced any effective response to this point, either within the book or without.  The internal response “I still think we need to worry about inequality therefore I side with Piketty” simply represents a misunderstanding of Matt’s argument.  Piketty’s mechanism of accumulation, as laid out in his book, is simply the wrong mechanism for understanding growing inequality, both theoretically and empirically.  And it is a shame that the Giles critique from the FT has attracted so much attention because it has distracted everyone from the more serious problems with the argument of the book.

dwb June 13, 2014 at 10:00 am

Any analysis of inequality in labor income needs to start with an analysis of unequal educational outcomes, and why cities implement policies that protect ineffective teachers at all costs, and trap kids in poorly run schools. Labor income starts with getting a decent education. 70% of students entering college from Baltimore City need remedial education. Without a high school education, people are qualified mostly for a life of crime or coffee brewing.

Floccina June 13, 2014 at 5:10 pm

@dwb The research that I have seen leads me to believe that bad schools are not the most important factor. Education and schools are not the same thing and the idea that low income latter in life is due to bad schools puts far too much burden on schools.

Eric June 14, 2014 at 9:03 pm

Floccina is right; unequal educational outcomes have much less to do with schools than with out of school factors (poverty, etc.). I would add that ineffective schools seem to have little to do with policies that protect teachers. We’ve have a decade of attempts by charter schools (with zero teacher protection) to clearly beat the regular public schools, and they can’t do it. It is actually pretty surprising that the charters aren’t more successful. Even the best, most highly touted charters do only marginally better, if that, than the regular public schools–and even those successes are mostly explained by the charters’ ability to exclude the most needy and difficult students.

prior_approval June 13, 2014 at 10:22 am

‘Matt has what is probably the single best, focused technical critique of Piketty.’

What, the combined efforts of the GMU econ deparment’s brightest stars and the leading lights of the Mercatus Center were not up to the job?

The Germans have a word for it – Armutszeugnis.

Finch June 13, 2014 at 11:11 am

Given PA’s posting history, it does not surprise me that German has a 13-letter word for “[T]he combined efforts of the GMU econ deparment’s [sic] brightest stars and the leading lights of the Mercatus Center were not up to the job.”

I’m surprised he doesn’t use it more often. It would save considerable bandwidth.

prior_approval June 13, 2014 at 12:10 pm

Well, to spare you any burden from actually looking at what ‘Armutszeugnis’ means, I recommend the resource of dict.leo.org –

Armutszeugnis – confession of failure, evidence of incapacity

Eric Falkenstein June 13, 2014 at 10:35 am

Good point Tyler: inequality is increasing, but it’s a different mechanism. That’s important because it implies very different solutions, so if you really care about reducing inequality, Piketty’s thesis isn’t helpful.

Martin June 13, 2014 at 10:39 am

“it is a shame that the Giles critique from the FT has attracted so much attention”

This is a somwhat rich point from you who frantically linked and retweeted every single critique of Piketty without any regard of quality, including Giles’ and what it means in several posts.

TMC June 13, 2014 at 12:01 pm

Why assume that since it should not attract a high level of attention that it should not attract any at all?

Martin June 13, 2014 at 12:20 pm

Not the point: TC did everything to dissipate focus instead of creating it, by turning attention to everything, nonsense or not, as along as it was a nominal critique of Picketty, because #bastionofresistance, or whatever mood affiliation crap he is notoriously unable to attest in himself. And now he complains what a pity this situation is to which he contributed more than any other.

Turpentine June 13, 2014 at 12:49 pm

+1

Aaron June 13, 2014 at 1:40 pm

Spot on.

Cliff June 13, 2014 at 3:48 pm

Most of the serious critiques of Piketty everywhere in the world were negative because his theory is garbage. As Krugman would say, reality has an anti-Piketty bias. It’s a big economic topic so Tyler posts about it, but he can’t force the world into a pro-Piketty alignment. I suppose you are the same sort of person crying because CNN is only linking to anti-Russian Ukrainian news stories, etc.

Martin June 13, 2014 at 7:31 pm

Cliff, my point really is not difficult and makes absolutely no judgment, at all, about Piketty’s book.

TC feels “it is a shame that the Giles critique from the FT has attracted so much attention” though he is on who helped turn attention to it with several posts. He is one of the single most responsible bloggers for exactly NOT focusing the critique to any salient point. Rather he linked and retweeted everything there was, at least partly beacuse he felt he had to create a couterweight to liberal suckers (go through his twitter feed if you don’t believe it) whom at the same time he had the chuzpah to call out for “mood affiliation.”

Jan June 13, 2014 at 11:38 pm

Looking back…yup.

T. Shaw June 13, 2014 at 10:42 am

Hayek, “Full [economic-outcome] equality for most cannot but mean the equal submission of the great masses under the command of some elite who manages their affairs. While an equality of rights under a limited government is possible and an essential condition of individual freedom, a claim for equality of material position can be met only by a government with totalitarian powers.”

Ray Lopez June 13, 2014 at 10:47 am

The Achilles Heel of Rognlie’s lie on Piketty’s peaked critique: property is not capital says Rognlie, which is not true says I.
Rognlie paper:
“Also using Piketty and Zucman (2013)’s data, I find that a single component of the capital stock—housing—accounts for nearly 100% of the long-term increase in the capi-tal/income ratio, and more than 100% of the long-term increase in the net capital share of income. In other words, when housing is removed, the long-term comovement em-phasized by Piketty and Zucman (2013) as evidence for a high net elasticity no longer holds—there is instead a small increase in the capital/income ratio and a small decrease in the net capital share of income. “

T. Shaw June 13, 2014 at 11:41 am

For “housing” to constitute capital . . . it must be monetized, i.e., abused as an ATM.

Home equity (estimated fair value less debt) may be viewed as a portion of an individual’s net worth (assets minus libauilities). Whether that can be unleashed as “capital” to invest and grow . . .

One of the “things” leading into the 2008 catastrophe was the “thing” that housing prices soared while disposable incomes stagnated. Was that (largely a creation of FDIC, FHLMC, FNMA, FRB, HUD, et al) income inequality? No. It was a signal-flare that the housing bubble was forming (which not one of you geniuses saw).

The concept that one’s home = ATM was part of the cause of the Great Recession.

Steve Sailer June 13, 2014 at 3:11 pm

The most important paper in American economics was published by Benjamin Franklin in 1754: “Observations Concerning the Increase in Mankind.” Franklin pointed out that Americans enjoyed better lives than Europeans on average because land was cheap and labor was expensive.

To maintain that advantage, Franklin suggested immigration restriction to keep the ratio of land to people high. Two years later, however, the French and Indian War broke out and Franklin devoted much of the rest of his career to advocating for military conquest of the interior, which also served to keep the ratio of land to people high.

Alexei Sadeski June 13, 2014 at 9:55 pm

What would he say of Singapore?

Locke June 14, 2014 at 2:22 pm

I think cheap land is a proxy for low population density which itself is a proxy for small labor markets. Small labor markets for a given industry implies a higher quality of life due to less competition. In an industrial economy where labor is segmented into few categories, the only way to retain smaller labor markets is through unionization or staving off immigration.

This suggests that a post-industrial diversification of labor market segmentation is the key to increasing overall quality of life. This is especially true in a hyper-globalized, hyper-automated, hyper-efficiency economy.

Sam Penrose June 13, 2014 at 10:48 am
joan June 13, 2014 at 10:57 am

The cost of capital is not r but (r+ delta) . If I did the math right the differencs in the elasity of substitution between the using net and gross is (1-delta^2). This is another example of errors people make when the are more modivated to find errors than they are in understanding a model. How ever it does not compare with thoes who claim he wrong because they write down his 2nd law wrong and then use it claim it is different from the text book Solow model

Piketty´s saving rate = S-(K/Y)d, where S is the gross savings rate because it is K that depreciates not Y. This means K/Y=(S-(K/Y)d)/g for Piketty´s model and solving for K/Y we get K/Y=S/(g+d) which is the same as the Solow model . Both models predict that when g= 0 , S= d K/Y.

Anon June 13, 2014 at 4:31 pm

No, you’re doing it wrong. Look at Krusell and Smith to see how to convert net and gross properly.

joan June 13, 2014 at 6:28 pm

Pikety uses national income for Y so g is the growth rate of national income and S is the savings rate for national income. Krusell an Smith thinks he is wrong because they are using saving rate as a fraction of national income but define the growth rate as the change in GDP. That is piketty send law is just (Investment/national income) divided by the (change in national income/national income). the denominators cancel so it is just (investment/the change in Y)

joan June 15, 2014 at 3:09 am

The fundamental difference between the text book model and piketty´s is not in the math since the both can be shown the to have the same form if g and s are defined correctly for model and for both when g=0, you get S gross = d K/Y and S net = 0 if you solve for S before setting g to zero. The cause of the different predictions as g decreases whether S gross or S net is assumed to be constant. Using in current values for S and d, both fit the data however since the depreciation rate is zero for land, d was less than .01 300 years ago when land was accounted for most of capital and 100 years ago when K was railroads and factories it was about .02. and now it is estimated to be .04 . For the long times that Piketty´s data covers clearly holding S net constant is the better choice. since S gross is now more that double what it was 300 years ago

lemmy caution June 13, 2014 at 11:03 am

At the end of the book Picketty focuses on stock investments. Stocks are already adjusted for capital depreciation and grow faster than g. Is there any chart of the total stock wealth of the 10% and 1% across time?

A focus on income inequality makes more sense in terms of the US anyway.

dead serious June 13, 2014 at 11:15 am

I like how Tyler pretends to be concerned about wealth inequality but reposts every single takedown of Piketty he can lay his eyes on.

It’s almost as if I can’t trust my own lying eyes.

TMC June 13, 2014 at 12:07 pm

If he is concerned, he would want to get the analysis right, as would you. It’s almost as if you’re not too concerned whether Piketty is correct, as long as it fits your priors.

dead serious June 13, 2014 at 12:39 pm

1) I’m not an economist. It’s not my job to debunk analyses, pick apart mathematical formulae, read through minutiae for that “gotcha” moment.

2) like I said, lying eyes. If you don’t see inequality in the US as having been growing wider, I don’t really know what to tell you. I’m on the right tail of the distribution so inequality is, if anything, benefiting me. Regardless, I don’t pretend it doesn’t exist because, as you put it, it doesn’t fit my priors. You’re the one who seems to be doing that.

Joe Teicher June 13, 2014 at 1:44 pm

>If you don’t see inequality in the US as having been growing wider, I don’t really know what to tell you.

I know that income data shows inequality widening, but are you saying you can actually observe it directly? What can you see that tells you that inequality is increasing and over what time period? Perhaps I am just too young or too unobsevant but I have missed it.

dead serious June 13, 2014 at 2:42 pm

A huge increase in the CEO: average worker pay ratio?

A huge growth spurt in deca- and centimillionaires and billionaires?

A huge growth spurt in products and services aimed at ultrarich people?

C June 13, 2014 at 4:11 pm

As he posited, he’s young and unobservant.

W June 13, 2014 at 7:25 pm

@C: or maybe he also observes that the poor have so much food they’re obese, that they have flat screen TVs, iPhones, laptops, central heat, cars with 11 airbags, abs, and GPS, Netflix, the Internet, that they live 10 years longer than in 1970, etc.

That the rich are getting richer doesn’t necessarily imply that inequality is growing.

Joe Teicher June 13, 2014 at 10:21 pm

dead serious:

1. Wasn’t the increase in CEO to worker pay ratio all in the 90s? I thought it peaked before they started expensing stock options when Sandy Weil used to make like $200M/year. Now no CEOs make that much. I definitely buy that CEO vs. Worker inequality increased in the 80s and 90s.

2. How can you tell that there are a lot more rich people now? The Forbes 400 has had the same number of people on it since I was a kid! Furthermore, wouldn’t that be an expected consequence of economic growth + an aging population? I’m sure that the baby boomers are a lot wealthier than they were in their 20s or whatever.

3. The McLaren F1 is like 20 years old. Neo Geo was more expensive than any current game console. Private jets and mansions and yachts have all been around for awhile. I remember reading Robb Report when I was like 11 and it was full of $200k watches and other useless stuff for rich people. I remember seeing the movie “The Toy” and the kid in that movie had a lot of cool stuff. Also, in Rockie 3 didn’t Rockie have a robot butler? Seems like luxury stuff has been around for awhile.

dead serious June 14, 2014 at 1:12 am

@W: One can consistently argue that while the American poor are likely better off today than 50 years ago, inequality has continued to grow. That’s pretty much what I see.

To Joe Teicher:

1) The divide may have gone logarithmic in the 90s, but it’s not exactly reversing its trend.

“In a new paper the Economic Policy Institute, a think-tank, calculates that chief executives at America’s 350 biggest companies were paid 231 times as much as the average private-sector worker in 2011. This ratio, which includes the value of share options, has begun to rise again after falling during the recession (see chart). This disparity matters more in bad times when the average Joe is feeling the pinch. Wages in America have been flat for years while CEO pay has risen substantially, sometimes with little relation to company performance.”

http://www.economist.com/blogs/graphicdetail/2012/05/ratio-ceo-worker-compensation

2) Hopefully you’re trying to be witty, and hopefully I need not point out that the Forbes 400 has 400 people on it regardless how rich they are relative to the rest of the population. However, take a look at the net worth of the Forbes 400 over time.

“The combined net worth of the 2012 class of the 400 richest Americans is $1.7 trillion, up from $1.5 trillion a year ago. The average net worth of a Forbes 400 member is a staggering $4.2 billion, up from $3.8 billion, and the highest ever, as two-thirds of the individuals added to their fortunes in the past year. Another factor: the gap between the very rich and the merely rich is widening. Only two in the top 20 are poorer, and as a group they are worth $73 billion more than a year ago.”

“Forbes launched its definitive ranking of the nation’s super rich in 1982. Back then the price of admission into this most exclusive of clubs was a mere $75 million of net worth. Even after adjusting for inflation, this year’s entry fee ($1.1 billion) is roughly six times what it was 30 years ago . There were just 13 billionaires at the time and the total worth of the 400 club was a mere $93 billion.

There has been much discussion of late about the widening gap between rich and poor and what role the wealthiest Americans should play in fixing society’s ills, and how much taxes they should pay.”

http://www.forbes.com/sites/luisakroll/2012/09/19/the-forbes-400-the-richest-people-in-america/

3) Luxury stuff has been around forever, but private ownership of islands and “yachts” the size of ocean liners hasn’t.

C June 14, 2014 at 6:57 am

Yes, obesity and falling technology prices is a great sign that there isn’t any inequality. Is this a serious argument? Cheap, low quality food and cheap entertainment is not a sign that inequality doesn’t exist. Keeping poor people fat and distracted is sort of a well known strategy in highly unequal societies.

‘The rich getting richer doesn’t neccessarily imply inequality is growing’ – Yes, that is exactly what it implies. The top 0.1% capturing a vastly larger percentage of a nation’s total wealth is absolutely an indication that inequality is growing. 95% of economic gains since 2009 is a sign wealth inequality is growing. CEO salaries rising at a rate 100 times faster than that of an average worker since the 70s is a sign wealth inequality is growing. TC’s own books recognize that society is stratifying, with huge rewards reaped by the rich (Average is Over) and the death of the few last powerful job industries in the United States (healthcare, education).

Suddenly a French guy notices that living in cheap housing, eating beans, and chronic underemployment (higher marginal utility of leisure my ass) may not be acceptable to the vast majority of the United States, and we’re all blind to inequality.

This pattern emerges over and over again. A problem is acknowledged by experts. Proposals to combat the problem are introduced. Whichever party does not like these solutions, and so they pretend that the problem just doesn’t exist.

And as others have pointed out, it’s pretty intellectually dishonest for TC to post weak critiques of Piketty over and over again, and then claim that it’s sad that we’re focusing on weak critiques.

C June 14, 2014 at 6:59 am

*Beg your pardon, “95% of economic gains since 2009 accruing to the top 1% of income earners is a sign that wealth inequality is growing”

david June 13, 2014 at 11:23 am

rognlie is burying quite a bit in “the literature studying markets with high housing costs finds that these costs are driven in large part by artificial scarcity through land use regulation”. that’s not wrong but it’s not straightforwardly appropriate either

the standard narrative of gentrification is that wealthy buyers create positive externalities that attract more buyers to the area (or conversely for poorer buyers), so locationally there is certainly an effect. rognlie is correct that unimproved land rent is pure rent in statics – that is to say, the supply of land is inelastic, so the owner absorbs any increase or decrease in value – but spatial (location) rent is certainly not inelastic; the supply or good vs bad locations isn’t even zero sum (new trade theory).

it’s important to remember that the artificial scarcity is, in many cases, binding only because there is a massive surge in demand for the housing to begin with – that is, it is scarcity politics to hopelessly shield a status quo way of life against an oncoming train, not scarcity politics to expel existing residents via pogrom. so where’s the demand coming from? it isn’t all immigration and population growth, especially not in European countries where population net of immigration is barely increasing as is

if this is the dynamic, then the elasticity of substitution between housing and other consumption can be quite high and still be consistent with rising housing cost and rising housing expenditures, since the driver is not an exogenous increase in housing prices, but an increase in demand for housing in good locations that then raises both. the increase in share of consumption will of course only be ‘slight’. And aggressive spatial substitution between locations is consistent with the observation that gentrification or decay of marginal neighbourhoods seems to turn on a dime.

Paul Lewis June 13, 2014 at 3:25 pm

How to Read Piketty if you haven’t finished Capital

By “How to Read Piketty” I mean how to get through his book, Capital in the 21st Century. This is a problem because the book is nearly 700 pages long. Here are a few reading hacks that might help you make it through the book.

1. Don’t read the book.

Instead, read the reviews. This is usually a good strategy for getting the sense of a book everyone is reading. However, with Capital, since there are so many reviews, reading them may take longer than reading the actual book. Alternatively, you could even buy the executive summary available from amazon An Executive Summary of Thomas Piketty’s ‘Capital in the Twenty-First Century’ by A. D. Thibeault. It is only 42 pages long and costs a lot less ($7.58 + $3.98 shipping and handling vs $26.19 and free shipping).

2. Read the front and back of the book

If you don’t mind spending the money, just read Piketty’s Introduction and Conclusion. Combined it only amounts to 42 pages (35 + 7. Hmmmm, 42 pages, the same as A. D. Thibeault, hmmmm.) This will give you a very good overview of the author’s intent and where is research leads him. As well, with this approach you will have read more of the book than 50% of the reviewers, as much as 45% of them.

3. Read the book selectively

Some people would like to be able to say they actually read the book, that they finished it, covering every page. How can this be done without causing harm to yourself or the book? Here are a few steps that help lower the number of pages you have to read, but without missing much of the content.

• For starters, set aside any notion of reading the footnotes. They’re at the back of the book, and if you try to follow the fine-print, you’ll waste a lot of timed flipping pages. This approach lowers the length of the book to 577 pages.

• As you read the book, you’ll notice there are a lot of charts and tables, about 115 in fact. Look at each chart and table and digest what they say. This will help you save about 230 pages. Why? Because Piketty seems to take about 2 pages to describe in words what the chart tell you visually. Why read a description of a line going up, down and back up when you can just look at the chart and see that trend. This brings the book down to 347 pages.

• Piketty obviously loves literature and uses numerous examples from Austen and Balzac, among others, to illustrate his points about the history of capital. Skipping these illustrative examples will save the reader a number of pages. I’d put this form of reading reduction at about 50 pages. That seems like a lot, until you look at the authors listed in the Index. Austen and Balzac are cited far more often than other writers, easily out pacing Marx, for example. Here we have to discuss Piketty’s math. Much has been made of alleged “mistakes” in the book stemming from a wonky spreadsheet. Piketty has addressed those questions. But, he has another possible numerical mistake to clear up. In the Index, Austen is listed on many pages, including “415-516.” If that was correct, then it would save the poor reader another 100 pages that could be skipped. However, “415-516” likely should be “415-416.” Assuming that to be true, the required reading count is lowered to 297 pages. At that length, it will take less time to read to read Piketty, leaving more time for Austen and Balzac.

david June 13, 2014 at 3:51 pm

you can also just read Piketty and Zucman’s papers

Tom June 15, 2014 at 3:37 am

I very much agree with Rognlie’s point. But there are so many big flaws with Piketty’s theory.

For me the biggest is the narrow focus on advanced economies. It’s very misleading to study inequality within advanced economies as if it were an entirely internal process. We’ve been talking about rising inequality in America at least since I was in university in the late 1980s. And back then already it was obvious that it was driven by the offshoring of manual labor and the dying out of the American well paid blue collar job. For me, Piketty is wrong first and foremost because he ignores the obvious globalization cause of rising inequality and instead seeks the cause in a study of the internal mechanisms of an economy imagined to be acting independently of the rest of the world, Maybe treating a nation as if it were insular was excusable in the 1930s, but it deserves to be laughed off the stage in the 2010s.

Actually, Rognlie’s point about capital returns can be subsumed into my point about globalization. If you look at the American elite’s share of American wealth, it surely has been concentrating over the course of several decades already. Which seems to contradict the logic that as capital accumulates returns should fall. But … the American aren’t investing exclusively at home. Or take a more extreme example of Japan, with higher savings and less domestic growth. How did the Japanese maintain returns on capital with practically no nominal domestic growth? By investing abroad, of course. If you look at the American elite’s share of global wealth, there’s not much change. Rognlie’s right that if there was too much capital globally, inevitably returns would fall. But actually global growth remains pretty healthy overall, and demand for physical capital is as strong as ever, if you know where on the globe to look.

Besides my point and Rognlie’s, there are at least two other major flaws in Piketty’s theory:
1) changes in the savings/growth ratio are assumed to be more important than changes in the relative appreciation rates of asset vs consumer prices. This is empirically wrong and leads to mistaking asset price price inflation since the 1980s for domestic capital accumulation.
2) long-term changes in growth rates are assumed to lead to inverse changes in savings/growth ratios. that is, savings rates are assumed to be more stable than growth rates, or in a word, “sticky”. Again, empirically wrong. Savings rates and growth rates are intimately related and tend to move in tandem.
By the way, those two errors are compounding. They both relate to Piketty’s “second law” of wealth/income = savings/growth rates. If each of the two above assumptions is true 50% of the time, both are true only 25% of the time,

joan June 15, 2014 at 6:46 am

Piketty is aware that using market values to calculate K can cause problems with model. He gives estimates of how much if the real increase in K is due to saving vs captial gains in tables at this link. http://piketty.pse.ens.fr/files/PikettyZucman2012Slides.pdf

joan June 15, 2014 at 7:14 am

Piketty does not ignor foreign investment. National income Y = (net domestic output + r foreign assets) and in graph 4 he shows that in 1800 foreign income accounted for a large fraction of the net income for the UK. If you do not have time to read his book at least look at the link.
I am not sure what part of Rognileś paper you agree with as I pointed out above Rognlie seems to have use r instead of r+delta for his cost of capital which would make his value for sigma wrong

Tom June 15, 2014 at 10:43 pm

This is becoming the canned reply of Piketty’s supporters, that everybody else hasn’t read his book. I have, and I’ve thought through it.

I know that Piketty is aware of the problem of capital gains affecting the wealth to income ratio. But his conclusion despite post-war data pointing very much in the opposite direction is that the ratio of real savings to real income is more important than relative asset to consumer good prices. Thus he ascribes a post-war trend that has very obviously been driven by capital gains to changes in the savings/growth ratio, which hasn’t actually shown any consistent trend – as growth slowed after the 70s, so did savings. And before the war the just isn’t very good.

As for foreign investment, Piketty leaves room for it in his definition of net worth and national income (Actually he follows the standard vanilla SNA definition, net domestic output + net international income, or gross national product less depreciation. You can’t sum output and assets, a flow and a stock.) The fact that Piketty makes a brief mention somewhere in his book of a role played by foreign income in 1800 does not change the fact that he ignores the huge importance of foreign investment in modern trends,

I’ll try to restate the core points as clearly as possible:

On a global level, or in a theoretical insular country, high savings relative to growth will inevitably reduce capital returns. Market forces will tend to adjust until capital returns reflect the propensity to consume.

In a real-world country, high savings relative to growth has two outlets: reduced returns or increased foreign investment. Generally there’s a strong preference for increased foreign investment over reduced returns, and this has been aided in the post-war era by greatly reduced costs of moving capital around the globe. Therefore the downward pressure on returns from higher national savings/growth ratios on national returns is far less than it would be in a theoretical insular country.

That explains how countries like Japan are able to maintain relatively high savings despite little nominal domestic growth. If Japan were an insular country, it would not save so much, because if it did, returns would be too low to reward savings.

Piketty turns that savings into something iniquitous, as if it’s somehow unfair that those who save more end up wealthier. That’s just a fact of life.

In some cases, inequality might grow simply because one part of a nation saves more than another. I’m not convinced that’s what’s happening, and I’m not sure we should worry about it if it were.

For me, unfairness is not about national aggregates that are somehow imagined to reveal an inherent tendency of the rich to grow richer at the poor’s expense.

Unfairness is about exploitation of the weak by the strong. The answer is democratic action.

However, the electorates of advanced countries need to be realistic about what they can achieve. We are after all relatively privileged people, and there is nothing inherently unfair about someone from a poorer country competing with us and offering to do the same job for cheaper. That’s actually a case of fairness at work, in my opinion. We after all like being able to buy goods at the very cheap prices enabled by foreign labor, and the truth is, we tend to be utterly indifferent to the exploitation of the weak in the poorest countries when comparing, say, prices for socks. The consumer can be the cruelest dictator, and there is no easy solution to that problem.

joan June 16, 2014 at 12:22 am

Piketty has estimates for the increase in real wealth due to capital gains from 1970 to 2010 using two different methods of 26% and 34%. Keeping in mind the GNP has not only increased from saving but also population growth and an increase in productivity per worker it seem like reasonable values for stocks. see http://visualizingeconomics.com/blog/2011/03/10/growth-of-gdp-per-capita-vs-stock-prices-since-1871
Except of the recent bubble in home prices, that had been mostly deflated by 2010, real price of housing only increased because newer home are bigger and better. http://visualizingeconomics.com/blog/2011/03/31/increase-in-housing-quality-and-its-effect-on-home-values-1940-2010

I do not think of myself as a Piketty supporter since I think his prediction for the future may be true in Europe but not in the US. However I do think that most of his critic do not understand or intentionally mis-understand what he is saying, not because of what he says about the future but because what it implies about our policies for the last 35 years. For example Rognlie’s assumption that because Piketty uses net values in his second law, the cost of capital R in a firms production function when calculating the value of domestic output to plug in to his equations will change to r=R-delta.

Tom June 15, 2014 at 4:34 am

I also think the whole inequality discussion needs to focus less on accumulated wealth and more on incomes. Income is the best guide to a person’s living standard. Rising inequality in advanced economies is very real and backed up with income data. I get the impression that net worth concentration was chosen not because anyone thinks it’s more important, but because the numbers sound far more concentrated, since so many people have little or no savings.

Glenn Schafer June 16, 2014 at 1:15 pm

There are only 500 CEO’s of Fortune 500 companies in the entire USA out of over 300 million people. On average they hold their jobs for less than 5 years after working more than 30 years to obtain them. It is amazing to me that all of the ills in the US can be traced to them. Last year Judge Judy made $34 million dollars for working 16 weeks filming her show. Dwayne Wade will make $23 million next year and his a shadow of his former self as a player. Julia Roberts makes $12 million for a movie that takes 6 weeks to film. The average salary for the top 3 starters for a professional basketball team is greater than the median income of $10 million for a CEO of a Fortune 500 company. There are thousands of people that make more than the CEO. Hedge fund owners, private equity, professional entertainers, professional athletes, small business owners, money managers. Many authors including Hilary and Bill Clinton. Certain well known environmentalists that were former politicians.

I ask why all the anger directed at the CEO when everything he makes above $1.5 million or so is tied to the increase in wealth of the people who employ him or her, the stockholders.

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