Stefan Homburg on Piketty

It is a useful overview (pdf, but better link here) of some of the major problems in the argument, here is one key passage:

Piketty’s erroneous claim is due to the implicit assumption that savings are never consumed, nor spent on charitable purposes or used to exert power over others. It is only under this outlandish premise that wealth grows at the rate r. If people use their savings later on, as they do in the Diamond model as well as in reality, the growth of wealth is independent of the return on capital. This holds all the more in the presence of taxes.

Piketty’s allegation that the relationship r>g implies a rising wealth-income ratio is not only logically flawed, however, but also rebutted by his own data: On p. 354, the author reports that the return on capital has consistently exceeded the world growth rate over the last 2,000 years. According to his “central contradiction of capitalism”, this would have implied steadily increasing wealth-income ratios. Yet, over the last two centuries or so, the period for which data are available, wealth-income ratios have remained relatively stable in countries like the United States or Canada. In countries such as Britain, France, or Germany, which were heavily affected by the wars, wealth-income ratios declined at the start of World War I and recovered after the end of World War II. The book’s references to these wars and the implied destruction of capital abound. They are intended to rescue the claim that r>g implies an ever rising wealth-income ratio. The United States and Canada as obvious counter-examples remain unmentioned in this context.

For the pointer I thank David Levey.


It's goes to demonstrate how blindly partisan even respected intellectuals thinking has become that a book with myriad holes and flaws that keep adding up by the day is hailed by those on the left as "one of the most important economic treatises ever" just because it supports their political allegiances.

And it goes to show how slyly partisan TC is in how he approached the book. Anticipating its arrival eagerly, heralding it as an important work, and then piling criticism onto it daily, while still suggesting it should be read.

MR commenters won't read it really consider its arguments.

Sometimes this joint is Drudge for the 135 IQ set.

That you will not cite things like MR or zerohedge in a PhD thesis or an AER paper,

certainly does not mean that it isnt interesting : - )

I suppose you missed all of the links Tyler provided to people who wrote rave reviews about it. You seem to think, without justification, that his praises are faint and insincere.

I could say that you are guilty of "mood affiliation," but I prefer to use the more colloquial term of "stupidity."

I'm pleased to learn that right leaning intellectuals are not subject to the same political biases as those on the left.

I'll sleep better now, knowing that.

So how would Tyler's posts be different if the book were indeed flawed?

If they were, they'd presumably be left-leaning intellectuals. /rimshot

Larry Kotlikoff makes a similar point in an upcoming column.

The rich always get richer ... except when they spend more than they make, or a variety of other circumstances.

For example, at the peak of British relative power and prosperity in the last quarter of the 19th Century, it was extremely common for British aristocrats to run out of money to keep their stately homes going. The main way to avoid having to shut down their houses was to marry rich American heiresses.

Consider Winston Churchill. His father, the second son of the Duke of Marlborough, married the Jenny Jerome, daughter of an American millionaire; and his cousin, the Duke of Marlborough contracted a notoriously loveless marriage to Consuelo Vanderbilt, the New York railroad heiress, to save Blenheim Palace.

@SS: was Churchill gay? Since you have a keen sense of gaydar it seems (from another post). Facts for: he was reckless in combat, as some gays are (they make good solders). He sued a boy and his family who said he had a homosexual affair with Churchill in boarding school: why would a boy make such an outlandish claim unless it was true? Further, he suffered from severe depression, as many gays do. Finally, he as a product of English boarding schools, which are hotbeds of same sex situations.

"such an outlandish claim": now you're being silly.

But Homburg is reciting exactly Piketty's claim?! see the bold language below:

"Piketty’s erroneous claim is due to the implicit assumption that savings are never consumed, nor spent on charitable purposes or used to exert power over others"

Is not this the theme of the "rich getting rich and staying rich"? So Homburg's argument is that Piketty's claims of increasing or stable wealth break down during wars? But of course they do: the poor are revolting against their masters. Just a thought...

That's eating the cake, they can't always have it too. If this act of power exertion goes to keeping profits up, then it is already counted in $r$. If it goes to any other end, it dissipates wealth.

That would be a revolution instead of war

The wars were characterized by the deaths of millions of people and what Piketty seems to like is the murder of Jews allowing the Fascists to steal their assets.

Any argument that suggests that this is a good thing, or a solution to anything at all is evil. If inequality is the problem, and that is the solution, inequality is not a problem.

Anyone who thinks that some great equalization won't look like rounding people up and stealing their things, all the while making everyone else substantially poorer if not dead is a fool. It will be different this time is not an answer. The people who are protesting the Google buses, and the highminded fools who drummed Eich out of Netscape are the ones who end up administering these things.

Obviously Tom Perkins was right and we are at the cusp of a genocide against the most productive in our society. The solution is to make private ownership of nuclear weapons legal, but with a net worth requirement of $10 billion or more.

Don't worry, Davie and Charlie, you'll be safe!

It's quite obvious that we should start with taxes, then call for total transparency of all taxes returns, so we can find out who the wealthy are--and hate them. After that, we'll erect small Hoovervilles outside rich people's gated communities to protest success and toss the occasional Molotov cocktail at a passing Bentley. Next we'll require them to present public apologies for their wealth. This will be broadcast on the major networks, especially MSNBC. But that won't be enough. We'll pass a law requiring all NRA members to disarm. Those weapons will be given to the fascist/socialist masses who will use them to start a slow trickle of kidnappings. Once we reach a critical mass of rich people, we will transport all of them to SF.

And here is how we'll end inequality. On the 4th of July we will march all money sucking enemies of the people out to the Castro, whereupon David Koch will be forced to execute his compatriots by running over them with a Google bus while Solidarity Forever blasts on the radio.

But as I posted before, Piketty says in Chapter 10, page 351,”For example, if g=1%, and r=5%, saving one-fifth of the capital from income (while consuming the other four-fifth) is enough to ensure that capital inherited from the previous generation grows at the same rate as the economy. If one saves more, because one’s fortune is large enough to live well while consuming less than one’s annual rent, then one’s fortune will increase more rapidly than the economy, and inequality of wealth will tend to increase even if one contributes no income from labor.”

Ha. Well, that seems to be it right there.

But what matters is not some pie in the sky make-believe masturbatory theory, it's what actually happens- right? Is r actually 5 and g actually 1? Do the wealthy actually just accumulate more and more capital until they explode??

Yep. Taken in addition to Piketty's extensive discussion of how unique the US is do to its explosive population growth and expanding territory compared to Europe, in addition to the confiscatory post war tax regime.

Another anti Piketty tirade that almost screams "I didn't read the book." And TC so blithely and repeatedly citing crap like this really makes you wonder.

My favorite evidence that Tyler will look for any way to criticize the book is his post of Hedlund's criticism, which confuses the safe rate of return for the average return on capital (hopefully Hedlund's tenure committee never comes across that blog post).

I didn't read Mein Kampf or Das Kapital either, and I don't need to.

I leave the criticism of academic sophistry to the people who get paid to do so.

I reject out of hand any policy prescription by a Frenchman to use government provision of unicorn shit to solve the dire problem of troll erectile dysfunction.


Assume a can opener.

Here is an article by David Leonhardt, editor of The Upshot, to which Tyler has contributed. Leonhardt takes a slightly more optimistic tone about our ability to address inequality, something he notes that we helped create.

Why would you want to address inequality?

As noted in books long before this year, inequality is a byproduct of modernity. And in our case, it's not unhealthy.

That is indeed the question. We know exactly what the movements of the last century that were built around equality looked like.

I think that those who want to address inequality are wannabe authoritarian thugs whose wet dreams resemble the rounding up of Jews and stealing their assets, the murder of Ukrainians, or the Cultural Revolution murders conducted in the millions. Jay Carney, a member of the administration has Soviet propaganda on his wall. Maybe he really wants to be Beria.

It is the level of inequality, not whether there should be any of it. I understand you don't want it to be addressed, but over 2/3 of people in the US at least are dissatisfied with it. It is actually quite simple.

When a modest proposal for increased taxes causes people to compare it to rounding up of jews, cultural revolution and propaganda, you know the other side is running scared.

Modest proposal? He talks about the state taking 60-70% of the economy. He talks about worldwide tax regimes.

You should be scared. The US has in the last few years implemented very expensive transfer schemes, from the drug benefits, Obamacare, food stamps, extended unemployment insurance, the loosening of welfare, etc. All these schemes, no matter their merits, become essential parts of the income of the people involved. But they require resources from taxation or borrowing power by the governments. The collapse of these social safety nets, either purposeful in reform or something akin to Greece, occur when the national governments lose the ability to raise revenue, or through mismanagement the resources are necessarily diverted to other places such as debt costs. Or economic policies that inhibit investment and economic activity.

If you cherish these things and want to make them better, stop being a blithering idiot and harping on inequality, seeing some magical pot of money that will solve the ills of everyone. These programs depend on these evil rich people for financing. If the US government was unable to borrow money next week guess who would be hurt the most. If you care about these folks, make sure they can get the services they depend on. That requires a vigorous economy. Vigorous economies produce inequality by definition.

The fact that a generation seems to believe that the stupid and bloody schemes to impose equality in the past are a solution to who knows what now does scare me.

What I fear most are people like you. Moral superiority matched with an earnest and cultivated historical ignorance. People like you murdered in the millions in the last century. And preened themselves morally for their enlightened ways.

Grow up and take responsibility for the utopia you want to create. The money isn't somewhere for you to confiscate. I understand the small minded stupid attraction to taking money from the rich. The problem is that if you do that, you can't have the other. Period.

Unless you believe in magic ponies. A majority of people who believe in magic ponies is extraordinarily dangerous.

I'm not morally superior to you, but you're being foolish. You immediately lose credibility by drawing comparisons to real tragedies the world has suffered. But not only are you loading your statements with provocative rubbish, your actual arguments make very little sense, mostly because you are attacking straw men.

The state taking 60-70% of the economy? "The fact that a generation seems to believe that the stupid and bloody schemes to impose equality in the past are a solution to who knows what now does scare me." What the the hell? I know you so desperately want it to be true that anything the government does, especially increasing taxation, makes everyone in the whole world worse off and leads to fascism, genocide, whatever. It's not true.

"These programs depend on these evil rich people for financing."
No, they depend on the evil rich people's property. The rich people themselves are seldom as essential as they suppose. One can usually find a substitute for the rich person among the thousands of not rich people that exist for every rich person.

@Jan: yes, Piketty did say he wanted the government to be between 1/3 and 3/4 of the economy.

@MF: if CEOs could be replaced so easily, they would cost shareholders a lot less. There are reasons why the rich are rich, and they are not what you want to believe.

Whatever: Steve Balmer announced retirement and microsoft's stock rose precipitously, it's strange that he was kept around for so long when he performed so poorly compared to Unnamed Successor. Japanese CEOs of successful automakers make radically less than CEOs of smaller less successful US automakers. The cast of the sitcom Friends eventually grew to make 1 million dollars per episode, initially they were paid much less to do the same work but over the course of time replacing them would disrupt a sufficiently valuable product that they were able to extract significantly more money. I guess they were just 6 of the most talented people in hollywood (whose careers mysteriously floundered despite their name recognition) and their amazing compensation was not a fluke or a result of their position in the organization. After all far be it from a free market to reward people arbitrarily.

Whatever: oh ok, that is exactly the same as 70%, sorry.

What if there was inequality and nobody noticed it?

Tyler asserted that is the case in a post the other day. What do you think?

Since I'm a 1%er, I suppose I'm not entitled to an opinion. After my bills, taxes, insurance, retirement savings, college savings, I certainly don't feel like a 1%er.

I never worried about what other people were making. I joined the Army to pay off my enormous law school bills, and worked as an assistant DA for several years. I gave up a career in law out of concern about ethics in the profession, and I took a substantial pay cut thereby. I found success in financial services with a fair amount of hard work.

I don't begrudge people for their fortunes no matter how poorly deserved I think they are. Most of my clients are small to medium business owners who literally worked 12-14 hours a day, 7 days a week "to build that." I respect them. When people moan about the wealthy, I'm more insulted about the affront to my clients than to myself. I have a few trust fund babies, but all of them have done fairly well with their education and work.

My daughters have a good platform to build upon. My wife stays at home with them. They go to Catholic school. I will likely pay for their college. But they are still one catastrophe away from having to rough it like I did, and we teach them to work and be self-reliant. I also teach them not to apologize for enjoying the fruits of my labor and our love. Their legacy is why I work.

I don't measure my success by the relative size of my wallet. I didnt make excuses for my failures. And i didnt blame anyone else for them either.

True, wealthy people work more than less wealthy people but the numbers you quote are far from typical (also it's not as though there aren't many struggling people working similarly long hours for every wealthy person). The idea that what separates the incredibly wealthy from those just making ends meat is hard work is nuts.

I don't bear any grudge towards the very wealthy, I just don't think their efforts and struggles are so unique. If wealth redistribution leads to superior utilitarian outcomes I support it, if not I'm against it. The distribution of wealth that emerges from a free market system is ultimately pretty arbitrary, lotteries of birth and circumstance loom large. It's important that incentives rewarding thrift, industry, efficiency, and innovation are preserved, but it's also desirable that incentives reward sustainability, stewardship, compassion and many other things that laissez faire does less well.

The idea that people deserve anything they are able to acquire through a series consensual transaction is the libertarian's silly superstition. The idea that people deserve equal resources is the socialist's superstition. People deserve nothing, but based on the accidents of accumulated history we've happened upon a set of rules that we use to navigate how we employ violence in the face of scarcity. Our current rules are among the best rules ever devised, but they are a technology; a tool for doing a job, and we have the freedom to accept or reject them based on their effectiveness (and what they are effective at).

Homburg's article begins with a major blunder that can only be due to extreme bias. A marginal tax rate of 330% means that if I earn another dollar, I will pay 3.30 in taxes; hence I should refrain from earning the dollar. The author counts the tax on the wealth in the marginal tax rate; that tax is paid whether I earn the additional dollar or not.

I haven't yet explored the r vs g argument nor read Pikketty's book; but this beginning suggested that Homburg's piece is not worth the trouble to explore.

I should also mention--if your income from the capital is 0%, your effective marginal tax rate is infinite according to Homburg's math. Should you have a bad year and earn -1%, it is negative.

Technically you are correct; the marginal tax rate is 80%. Homburg should have phrased it differently, as an example of how wealth is destroyed. The perverse nature of a wealth tax is that standing still leads to slow death. If a normal return of 4% is so unavailing to the holder of capital why bother? This is a formula for destruction of prosperity, for without the increased productivity derived from capital investment, we would live like mankind did 2,000 years ago.

In public economics it is common to convert a wealth tax of 10 percent into an income tax of 250 percent if the interest rate comes to 4 percent. Add Piketty's 80 percent income tax, and what you get is a total burden of 330 percent.

I believe Piketty would not object to Homburg's calculation: Such a burden is exactly what Piketty wants.

Ladies and gentlemen, stop listening to that French guy--I made a very similar argument many years ago and no one noticed! Pay attention to me!

Piketty doesn't make that error. Piketty uses the concept of National income rather than GDP as his measure of annual national income. And national income is defined as net domestic product (NDP) plus income from abroad. The difference between NDP and GDP is that net domestic product reflects "the depreciation of the capital that made this production possible."

Any income not consumed during the year it is produced is part of national savings and gets added to the capital stock. But there are also reductions of the capital stock each year due to the employment of earlier savings in current production. Those annual reductions are subtracted from GDP to get NDP, and thus reflected in the calculation of national income. In terms of Piketty's variable "r", r for any given year is equal to National Income/Wealth, and so the fact that capital is constantly used, and hence depreciated, is indeed reflected in the calculation of r.

But the empirics don't support that inequality constantly grows given r>g

They do, but not only does everyone have their own facts, these days everyone also has their own data.

I'm still learning from comments about Piketty's book, including from comments in the comment section. If someone wants a basic introduction to the book, my favorite secondary source so far would still have to be the presentations and discussion from the following event:
"Piketty will provide a brief synopsis of his book. Dean Baker of the Center for Economic and Policy Research and Kevin Hassett of the American Enterprise Institute will provide commentary. Tax Policy Center Director Len Burman will moderate the discussion, focusing on the role tax policy might play in mitigating income inequality, and field questions from the audience."

I found this discussion very interesting and easy to follow, with each panelist making some good points.

One spend thrift, one childless generation, one very charitable generation, one very bad investing generation can dissipate a family fortune.

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