The Piketty Bubble?

Piketty’s Capital is not very clear on how to distinguish greater physical capital from higher asset prices. For the most part, Piketty discusses capital as something that builds up over time through savings. The increase in physical capital then generates large returns to rentiers and those returns increases the capital share of income. When it comes to measuring capital, however, this has to be done in money terms which means that we need the price of capital. But the price of capital can vary significantly; as a result, Piketty’s capital stock can vary significantly even without changes in physical capital or savings. When capital increases because of changes in its price, however, the implications are quite different from a physical increase in capital.

Consider an asset that pays a dividend D forever; at interest rate r the asset is worth P=D/r. As r falls, the price of the asset rises. An asset that pays $100 forever is worth $1000 at an interest rate of 10% (.1) but $2000 at an interest rate of 5%. Piketty measures a higher P as more capital but notice that P is high only because r is low. You can’t, therefore, multiply P by some fixed r and conclude that rents have increased. Indeed, in this case rents, the dividend, haven’t increased at all. For the most part, Piketty simply ignores this issue (at least in the book) by arguing that changes in the price of capital wash out over long time periods but that does not appear to be the case in his data.

According to four French economists, Piketty’s measure of the capital stock is greatly influenced by the Europe-US housing bubble that preceded the financial crisis (Tyler earlier pointed to the French version of this paper, this is the English version). Since Piketty’s theory is based on rents from physical capital, the authors suggest that measures of housing capital based on prices should be corrected using the rent to price ratio. In other words, if the rentiers aren’t getting more rents then their capital hasn’t really increased. When measured in this way, the authors find little to no increase in the capital stock in either France or the United States.


Addendum: Do note that the debate here is not about income inequality but rather the source of income inequality and the implications for the future that Piketty draws from a  (possibly not) rising capital stock.


In defense of Piketty, it is not obvious why we should treat housing different from, say, a Satanic Mill that produces cotton cloth. First comment!

@myself: Oh, one more thing: we bought DC real estate in 2006--at the height of the so-called bubble--and we thought we made a mistake, but the price today is greater than what we bought it for. As Nobelian R. Shiller said (not to be confused with prolific chess book author E. Schiller), they don't make land anymore, in coastal cities, so you can become a comfortable member of the 1%, as I am, if you buy in select markets. It might be different in Vegas, Arizona and Milwaukee.

Ray, Or, if you are a Famanista, when you bought your house it was known that you lived on the east coast, near water, and, the housing market contained all the information in your purchases price, including discounted future prices.

Try sleeping comfortably on that.

All is illusion. You just wait till Paul Rand comes to town and depresses housing prices by dismantling the behemoth. You just wait.

Of course, housing prices did escalate during Reagan.

People who can't outperform the market take comfort in the illusion that other people can't as well.

That must mean that Fama is wrong...SOMEONE must be able to outperform the market, according to you.

I've never seen the DC real estate market as hot as it is right now, including 2006. It feels like "Dow 36,000" all over again. How can I short this market?

From the graveyard.

It's interesting that farmland has been relatively more important in France than in the US.

France is a low density country where agriculture plays a larger economic role vis-a-vis the US which is smaller landwise and more densly populated

"France is a low density country where agriculture plays a larger economic role vis-a-vis the US which is smaller landwise and more densly populated "


France 306 people per square mile
USA 84 people per square mile

And no, the ratio doesn't change if you measure in kilometers or hectares.

Farmland is more important in France because (a) they have regarding farming as culturally important, (b) they subsidize it considerably, (c) there is more, not less, pressure for other uses of land.

You may have misunderstood, but his/her comments are for entertainment only. Treating them as factual is like treating The Daily Show as a news program.

You may have misunderstood, but his/her comments are for entertainment only. Treating them as factual is like treating Fox News as a news program.

*Edited for correctness.

It's more like Stephen Colbert, in that JAMRC is parodying the stereotypical pompous economist. He's choosing the right-wing version, but he just as easily could do Krugman or the like.

Sure, but usually his comments are a parody of a particular normative economic view. I don't see them normally getting basic objective data such as population density wrong.

You may have missed this from the Washington Post:
Fox News big shots will be dining out on this one for some time: Assemble a crowd of civic-minded people at the 92nd Street Y in New York’s Upper East Side. Issue a compliment for Fox News. Listen for the groans.
That’s what happened yesterday as Jeff Greenfield interviewed Time magazine’s Joe Klein at the historic venue. The chat alighted on early-evening news programming, and Klein ripped CNN for focusing excessively on Malaysia Airlines Flight 370. “I miss being able to turn on a straight newscast, and it turns out the only place to get one at 6:00 at night is Fox.”
“[Audience mumbles and groans in disapproval]” (See 1:08 in the video above).
Greenfield jumped in: “Don’t mumble, folks, he’s telling you the truth. ‘Special Report’ by Bret Baier is…”
The only other choice, argued Klein, “is to go to MSNBC and see the Rev. Al Sharpton, who I still consider to be a major criminal” over his role in the Tawana Brawley case.
Cheers came from the crowd for that opinion, as they did for CNN. Perhaps people just like to hate cable news.

It really does depend because the SI standards were changed in 2005 so it really matters what year your measurement data is coming from. Before 2005 you would be correct but due to changes in SI units France is actually now larger in landmass than the US.

The USA is less densely populated than Africa, let alone France.

Hi Alex. The more I examine his book the more mistakes I find. 1) Inequality in the US coming from overpaid corporate executives (with no skin in the game) belongs to labor & has nothing to do with Kapital. 2) Increases in wealth seem to come from asset price inflation (particularly housing) AND lower corresponding return. 3) r=g is an integral over time he should write it as so, because of convexity.
Finally his measure is BS

1, Fat tails have existed over all time in income distribution. Why are tails getting fatter? Why is the middle getting thinner?

2. I dare you to tell an executive he/she is a laborer. Or, if he/she is, I'd like to join their Union.

Also, if you look online, you will see that Piketty uses wealth and capital interchangeably, so the criticism of labor/capital division fits with one definition but not the other. If you use wealth, the criticism doesn't hold: I get $20 million in exec comp and stock, and my wealth is $20 million, and my stock of capital is $20 million, and my earnings on my wealth, or is it capital??, is $x per year as I sit in the Bahamas drinking rum and coke.

If price and value are identical, then wealth is wealth because wealth is set by the price and the price of $20 million is absolute value.

Or so we have been told for three decades of free lunch economics.

I grew up in the 60s taught leftists economics in high school civics in Indiana.

Value was the cost, in labor, of something. Price was a function of supply and demand and had little to do with value.

When borrowing money, the allowed debt was 80% of the lower of value and price to account for the price going down more.

But since 1980, price defines value, not the labor cost of a new one, and "liberating wealth" means borrowing 80-90% of the inflated price.

In other words, you are paid in stock priced at $20 million in order for you to secretly sell off capital assets to double profits and create wealth by doubling the stock price to $40 million, which you then sell before the secret that the firm is doomed comes out and destroys all the wealth.

So different than in the 60s when stock prices were capped to the capital assets which included the value of investing labor in R&D and investing in labor and putting the golden handcuffs on them so the people who were the key to long term growth were kept from your competitors. After 1980, the inventor was just like the janitor on the balance sheet of the CEO, a line item cost to be slashed to create wealth - stock price inflation.

You need to put your question in the frame of leftist 60s economics and the free lunch economics since 1980. Since 1980, creating wealth is real easy and generally involved getting the labor out of it. In the 60s, only lots of labor could create wealth by building lots of stuff that was not consumed immediately - very puritan. Or dismal. Since 1980, economics has been very gay, money - wealth - for nothing as Thomas Dolby sang it.

I believe it was Dire Straits rather than Thomas Dolby. But Nobody Does It Better than you, mr. Mulp. The thread is now complete.

Typical Taleb mood affiliation though, wrongly claiming he knows better than Boards of Directors how much executives should be paid.

Not sure if you're joking or not. Your assertion 1 is wrong (corporate executives are just one group of overpaid elite, and their overpay comes from ownership in the firm, very much more skin in the game than outside investors who can sell at any time). 2. Asset price growth is a form of capital return, so I'm not sure what you're arguing here or how it disagrees with Piketty. 3. How would this change his conclusions?

And, btw, your "Antifragility" book was fucking awful.

All his books were pretty awful.

Now that the midgets have weighed in, the issue is settled.

@ Rich Berger - I recall Paul Krugman commented on one of your posts, so you're no midget? But it was a fake Paul Krugman (it was me) and since TC is on the road it's not clear this poster is the real N. Taleb either, since TC usually will delete a fake famous person post I notice (he's done it to me, he must track IP addresses). BTW I would not say Taleb's books are bad, it's more like what I would write if I was famous.

Ray, wouldn't you write more about how to score with young Filipino girls?

Give the people what they want Ray

I don't think this is a mistake. If I understand Taleb's argument correctly, it goes like this:

1. Any individuals chance of being superrich is the same across history.
2. The distribution of superrich-ness has a fat tail.
3. Ergo, when there are not very many people, your observations of how many superrich people actually exist tells you little about how likely you are to be superrich.
4. Ergo, time series in the presence of population growth give a mistaken impression of increasing probability of superrichness.

I don't think this affects Piketty's argument. To the extent social disaffection is fomented by superrich-ness, it is not a function of the probability of being superrich but rather of the actual presence of superrich individuals. Thus, it is still true that actual inequality is greater when population is larger, even though the underlying degree of statistical meritocracy may be the same.

I would suggest the same regarding Taleb's critique of Pinker. As I see it, a world in which 1% of people are killed every year is more tranquil than one in which 100% of people are killed once in a hundred years on average. Even though my individual likelihood of being killed in any given year is the same.

This is not to say that Taleb's point of view is invalid. A person may validly consider that the appropriate measure of meritocracy is P(superrich) and the appropriate measure of tranquility is P(violent death). But that is not per se a lacuna in the approach of Piketty or Pinker.

I meant:
As I see it, a world in which 1% of people are killed every year is LESS tranquil than one in which 100% of people are killed once in a hundred years on average. Even though my individual likelihood of being killed in any given year is the same.

Can openers for everyone!

Or at least larger screen TVs, as the capital stock of the masses grow ever greater.

(Might be on delay here. Tip to commenters - don't use Latin when referencing a Latin derived public policy center's practices involving the marketplace.)

I totally skipped MySpace and breakimg bad with any luck I can outlast Facebook, piketty and game of thrones.

Well unless you plan on jumping off a bridge prepare for a lot more Facebook in the world because it's going to be the basis of the future along with BitCoin.

....and immigration.

Good advice.

Well pretty soon the iPhone implanted in your forehead can tell you what shows to watch.

Alex, if you really want to give Piketty and his Army something to chew on why don't you ask why they don't advocate a policy that would virtually eliminate global inequality: open borders?

Doesn't this failure to distinguish between the value of an asset and the stock of an asset undermine his whole story?
Which doesn't mean there isn't a problem with inequality. There is. But it's nothing to do with "r>g".

You and others have pointed out the mess from treating "capital" as a physical quantity from prior investment, going into the production function and at the same time, treating it as monetary wealth. It all gets muddled.

Part of the analytical confusion comes from the common usage of a Solow-type growth model with a single homogenous good which can be consumed or invested and held as wealth.

It seems to be a more fruitful model would be something like the Foley-Sidrauski model, a neoclassical two-sector growth model with a full menu of asset choices. Capital is a distinct good from consumer goods, and the model has a relative price of capital goods compared to consumer goods. Because the price of capital can change, we can model both physical capital as a factor of production separate from the value of capital in the consumer budget constraint.

Although Foley and Sidrauski did not do so, one could add a bubble in the price of capital into their model. It would generate more inequality while it lasted.

Another addition of the model would be to add a depletable natural resource which is a factor of production ("oil"). Over time, the real price may rise, and if the Hotelling rents are confiscated by an elite, the result would be great and rising inequality. This idea goes a long way to explain what is happening in Russia, the Persian Gulf, and parts of Latin America. And it is a long way from Marx. There is no surplus value in Hotelling rents.

Cowen unintentionally confirms one of Piketty's main concerns about inequality: the political influence of the 1%. It's obvious that asset prices go up and down over time; indeed, I've made the point many times that markets correct not only over-priced assets but excessive inequality. Thus, in the 2008 financial crisis the price of housing collapsed (and, except in a few overheated markets - the Bay area and NYC - hasn't recovered), imposing large losses on, mostly middle class, owners of houses. And what about the lenders who financed those houses? The government and the central bank intervened to prevent the value of the bonds from collapsing. And who held those bonds? That's not to dispute the choice made by the government and central bank (or to argue in favor of letting markets self-correct excesses when the self-correction results in another depression), only to point out that the choice was made - and some benefited more than others; indeed, it's ironic that the choice led to the creation of the Tea Party. And the choice affected not only those bonds, but investment capital generally, the value of which most likely would have collapsed like the value of housing in the absence of intervention by the government and central bank, and "corrected" the excessive inequality that Piketty finds so concerning.


Take a step back and look at the PIIGS. In all of these countries facing economic crisis, the parties converged. Even in Britain, you find allegedly ideological opposites in a power sharing arrangement. In America, it is hard to the tell the two parties apart on most issues. The reason they scream so much is their differences are trivial so they make them seem enormous by screaming at one another.

An out of sight class of super-rich is not an issue if they are competing with one another for control. What appears to be happening today is they are all on the same page ideologically and pragmatically. For instance, find people on the Forbes 400 who oppose immigration, gay marriage or corporatism. Almost all agree on all of the big issues. As you point out, they all agreed to defend themselves in response to the financial crisis of 2008.

Immigration is a very sensible policy championed by sensible people you might as well be asking "find me one person on the Forbes 400 that believe the earth is flat". I mean please - we have more open and diverse discussion today than any other point in history. It just so happens that the system works great today for virtually everyone. The quantity and quality of speech in the public space keeps improving.

I have indeed noticed a Piketty Bubble. For proof, just look at how many Piketty posts are on this site!

Piketty must really be onto something. Just look at the amount of time devoted by bloggers such as Tyler and Alex trying to destroy his arguments!

It is one thing to and try and engage the book adverserially. That's how academics work.

Tyler, however, tipped his hand and jumped with the awful post that cherry picked poll results about inequality. From that point on, it has been clear that poisoning the well is a perfectly acceptable outcome.

I think a lot of the backlash against Tyler's critique I see here is basically driven by mood affiliation and the politics of envy. Same stuff that drives perenial trolls like Z and Steve Sailor.

Isn't Steve Sailor a crewman on the U.S.S. Racist Express?

I agree. But then again. Tyler and Alex themselves blatantly exude mood affiliation. What we need is more academic work on the issue.

I really have to disagree here, both Tyler and Alex are highly professional even-handed scientists. I never get the sense that they have any mood-affiliation biases, when they do take sides it's usually based on solid scientific evidence. Their critics on the other hand tend to be little more than savage, ignorant barbarians.

I am in love with Tyler and Alex

I'm sorry you guys missed the point.

The point of the survey citation was not to undermine the argument. We don't see arguments through a lens of politics.

I might say the point is to let the people who think inequality is the next global warming might need to wait at least one whole week and maybe two whole books.

This whole Piketty response has been a weird experience for me. As someone to the left of TC I usually feel that he engages in a lot of sly and deceptive tactics when he really wants to push one side of an issue. But I feel like he has been almost entirely correct (and fair!) in his criticism of Piketty. Yes, he is paying a lot of attention to Piketty, but that's because the left has decided (for god knows what reason!) that a bunch of data on wealth inequality over the years finally demonstrates that all of their preferred policy positions are absolutely correct (or something!). Maybe it's because even though I sit to the left of TC, I'm not really a leftist by any stretch, but I don't see that Picketty's book has accomplished much of anything. Lots of valid data, yes. But even his contextualization of that data is poor, much less his proposed implications for policy. It hasn't moved the needle for me at all but I'm pretty certain that for the next several years I'm going to see leftist constantly making arguments along the line of, "Well as Pickety proved such and such, therefore such and such is obvious". And they will all be wrong (more or less). I'd like to see them making actually sound arguments if possible. I can't personally do anything about that but TC continuing to push valid criticisms is really the best I can hope for at this point. He's regarding better on the left than most of the folks in his political neighborhood.

"I’m pretty certain that for the next several years I’m going to see leftist constantly making arguments along the line of, “Well as Pickety proved such and such, therefore such and such is obvious”. And they will all be wrong (more or less)"

You're probably right. For an example from the other end of the spectrum, just look at the Laffer curve and supply-side economics more generally: despite the lack of robust evidence on the link between tax rates and growth, it's still very central to the policy discourse, more than 30 years later...

It's kind of depressing for anyone who cares about evidence-based policymaking.

Good point. When you simply posit that Piketty is correct, all becomes clear.

I happen to be very skeptical about Piketty's claims. The difference is that my view is based on the body of evidence on the issue (basically that it's been so far very difficult to find a quantitatively and statistically significant link between inequality and anything macro), not some nitpicking on price deflators and carefully chosen survey questions.

Maybe you need to update your priors

This is a difference that makes almost no difference when addressing inequality in the US using measures of Capital since the value of owner occupied housing is 80% of the total.

I'm sorry, you mean it is a difference that completely changes everything? Owner occupied housing is 80% of total housing or of total capital? Owner occupied housing should also be valued based on the rent- the value of owning your own house is not having to pay the rent on it.

Actually the stock of residential housing has really collapsed just recently due to entire housing blocks being demolished and replaced with hotels. A lot of people have come home to find themselves being charged five times the rent just for walking down their old street.

I have no idea what you're getting at

You haven't seen this going on recently? It may just be anecdotal but it seems like whenever I see a city or suburban block with four houses on it, I come back next week - suddenly the houses are being torn up, someone's building a hotel.

ok so this exchange is hilarious

I'm glad I found this blog just so I could read this comment.

I have no problem with Cowen's adversarial approach to Piketty. After all, it was Piketty who picked the fight by including severe criticism of the micros and the Chicago School in the final chapter of his book. Whether they deserved the criticism is beside the point. By including it in his book, Piketty invited a less than a cooperative, or even hostile, attitude from his adversaries. Returning fire is what one does in war, including a class war. I should add that, in my view, the best response to excessive inequality is a market response, just one that doesn't include a depression and one that doesn't include "rinse and repeat" (i.e., recurring financial crises); and it's the micros who are best qualified to devise it.

"the best response to excessive inequality is a market response"

What form would this market response take? I'm genuinely curious.

Rayward, you are being too generous. Piketty disowns economics altogether. He's come over to political economy. But, as so often, he shows what a confined rarefied world he lives in. He seems not to realise that for example political science or sociology do this stuff too...

Piketty quote of the day:
Loc 10144 “I dislike the expression ‘economic science’ … I much prefer the expression ‘political economy, which … conveys the only thing that sets economics apart from the other social sciences: its political, normative, and moral purpose”

So which side of the Cambridge capital controversy are you on? This post sounds awfully close to echoing Galbraith's "left" critique of Piketty:

All of these aspects of Piketty's book (the economic history, the r > g) are very interesting and worthwhile. Plenty for economists like Taleb and Alex to get their teeth into. Why for goodness sake did Piketty have to spoil the 'base' by creating a political message 'superstructure' that has no empirical or philosophical foundation whatsoever, that cannot be extrapolated from the data, and then making that message the 'take away'. It makes him look foolish. I wonder if he was badly advised by the publishers. Or maybe it was naked ambition. Anyway, it's on mind, I finished writing my 'review' an hour ago.

Taleb isn't an economist. He's a financier who writes papers in his spare time.

Like I often say about doctors.

I'm not a doctor. And neither are they.

I think "inequality" is also badly measured with respect to housing.

The owner of a 2,000 square foot apartment in Manhattan might have 10 times as much housing wealth as the owner of a 2,000 square foot home in the Dallas suburbs, but the actual material standard of living is not higher. In fact the Dallas homeowner probably would not want to switch places.

Although the marginal buyer highly values the amenities of living in a dense urban center (as shown by prices), the average person probably does not.

You all are missing the obvious:

As long as the word "INEQUALITY" keeps being repeated, the LEFT wins.

The superior economics argument will not be a deciding factor in 2016.

Not necessarily. Take the late lamented global warming, er climate change, I mean climate disruption, as a parallel. We have been told that we are doomed, with disaster around the corner, for 30-40 years. This campaign is slowly dying and the increasing shrillness of its champions is having the opposite effect as people tune it out. As deadlines for doom come and go, new ones are issued, but returns are diminishing. The current mania about inequality is very similar - doomsday predictions based on shaky economics with the solution being - tada - more government power. Detect a theme?

Obama was able to leverage attacks on Mitt Romney's wealth, abetted by the Occupy mob, and squeezed out a victory in 2012. Things are not looking so good for the Democrats this year and they are desperately trying to change the subject from Obamacare and the weak recovery. So we get inequality, minimum wage and..climate change. I do not think they will be successful again.

Rich, whatever helps you sleep at night.

Did you even read the link you provided, beyond the headline? I should have cited it myself!

Do you mean this part:

"Again, lots of people still express doubts about climate change*. But the trend is of scepticism falling, not of it increasing.

Yet, people who're worried about climate change keep insisting opinion is going the other way, regardless of the evidence. I particularly enjoyed this blog, which linked to my article showing that doubts about climate change are falling, then continued: "there is no denying that scepticism about the nature and seriousness of climate change has increased - rather than decreased - in recent years." (I deny it!)"

No, I didn't read that part. Not at all.

I can hear the gear wheels turning in Hillary's camp from way down here, and I can only imagine in horror as the US repeats the epic failures of a state like Argentina with redistributionist policies and a husband-wife dynasty in the White House (instead of the Pink House this time).

Hillary is probably not going to get far in the Democratic Primaries. The Media has this one called all wrong -which is unfortunate since I'd love to see her crash and burn in the general election, but that's the way it is.

A lurid part of me imagines that a Bush/Clinton ticket in 2016 would be a wonderful outcome for the Libertarian party. I mean, in terms of major fallout from the lousy two-party system we have now. Dynasty, anyone? Gag reflex engaged...

Yeah but Clinton is seen by the Dem base as being way too centrist. The Dem Base has gone completely nutty - they're going to for someone who is much more out of the mainstream like Michael F. Brennan or Dennis P. Williams. The Hilary-Bush contest would be very interesting but I just don't see it happening given how far left the Dems have moved.

Yes, however she is a W-O-M-A-N. They may be tempted to strike while the iron is hot, coming off of their success with the black man.

I am not convinced that policy positions matter anymore, especially since neither of them do what they say anyway. Populism in ascendency....

Yeah, climate change and inequality who cares those hoaxes. What we should fear is hyperinflation and federal debt, right.

Actually, yes.

Although "hyperinflation" may be in the eye of the beholder. But watch how fast people lose interest in climate change and inequality (unless it becomes proxy for "generally pissed off") if the depression takes another leg down, this time with rising prices.

Keep in mind, the r>g meme, just like global warming, imply semi-distant future problems.

Also, in both cases, governments have never demonstrated an inability to wreck economies on short notice.

Any day now we are gonna get that hyperinflation... How long you going to worry about imminent hyperinflation before you realize it isn't coming. At the same time, at what point is it obvious that the previously theoretical relationship is no longer theoretical. It is happening before ou very eyes. The disregard for evidence is astounding.

Piketty and Zucman say a few words on the housing bubble explanation of the increase in wealth-output ratio, according to them it does not contradict their model : a high enough savings rate + a strong national taste for real estate can fuel a housing bubble instead of increasing the real capital stock.

Indeed it is disturbing that the countries with the highest savings rates also have the biggest increase in housing capital (Italy and Japan for example).

P = D/r.

In practice, D is not fixed, but changes with growth, e.g. stocks, housing rents, thus the dividend growth model is:
P = D/(r-g).

Typically if r declines, g declines too, so that P is not as sensitive to r for assets that are not fixed income.

What about rent controls? I would imagine that some of the difference in returns between renting and holding to sell a housing asset comes from the fact that in many areas of the world (particularly those with dense concentration of housing stock) some owners are restricted in how much they can charge for rent.

Thank God.

I couldn't even bring myself to read the book, given that -- in my personal experience -- it has been a brutal 6 years for capitalists. How exactly am I supposed to get wealthier from my personal capital? Interest rates are at record lows -- both real and nominal.

Even large pools of capital (large pension funds) are getting average (at best) returns. Hedge funds -- the 'smart money' are doing embarrassingly poorly. "The HFRI Fund Weighted Composite index returned a healthy 6.16% in calendar year 2012, vs. -5.25% in 2011, for example."

The only group that I see that are doing well on all levels -- income, wealth, and to some extent consumption -- are the best paid group of service providers (doctors who do procedures and subgroups of the traditional professions (tenured faculty,for example)). That is, service professionals involved in areas that have high barriers to entry. Members of these groups that aren't at the top of their professions earn much less (primary care medicine, adjunct college professors, &c) And, I don't envy the highest paid because they aren't the idle wealthy but tend to work long hours in demanding environments. They hardly strike me as close to the stereotype of wealthy.

If returns on capital aren't exceptional, what is the driving force of this enormous, powerful trend.

I would also like to see more analysis of the segments of the 1%.

At one end, you have Bill Gates and Warren Buffett. They are giving away most of their wealth, and they are not extravagant consumers. Even if you consider their philanthropy uninspiring, it seems to me at worst, no worse than a large part of US Government expenditures.

The real argument about inequality involves inequality of consumption -- which aren't THAT dramatic among the very wealthiest. Unless you consider charitable contributions, which are, in my opinion benign at worst an quite beneficial at best.

The working wealthy -- the bottom of the one percent -- tend to work very hard, have high marginal tax rates -- and if they live in high cost costal US cities, live in a manner that few people would associate with wealth. Even if they seem wealthy to most Americans, I am sure they don't feel remotely wealthy. As an example, a mid career Manhattan professional with an income of $600,000. The top marginal Federal tax rate, state taxes, local taxes, high sales taxes, property taxes for one. Real estate prices that are double of most of the country. A private school tuition or two to get educational services roughly equivalent to high quality suburban schools, etc.

And a notch below are the working 'near wealthy' that get hit by alternative minimum taxes. It takes personal experience to appreciate the visceral annoyance of this part of the tax code. Basically, in the $160 plus level, every single personal tax preference and a lot of deductions disappear. Roth IRA's, Educational tax credits (all the while not qualifying for financial aid), personal deductions. And, to top it all of -- getting lumped into the category of rich and greedy is enraging. This is America and a lot of people in this situation suck it up and don't obsess over it -- but getting constantly reviled is too enough to engender some degree of rage.

I have no idea regarding the lives of the 1% outside the public information of the richest and my personal experience with the so called 'working wealthy'. I suspect a lot of them are fairly old, have accumulated their wealth over most of a lifetime, and will die within 10 to 20 years. I certainly don't envy this group.

And one final thought -- I know individual with reasonably generous government pensions. For example, a two income family with a government pension of $8,000/month and modest assets. The pension also includes health benefits and reasonable cost of living adjustments. The pension alone, at 5%, would require investible assets of $1.6 million to produce this income. Anyone that researches life annuities will find that there is modest increases in income for the mortality component for strict life annuities, and escalation features are very expensive. People that worked their entire lives to receive these benefits -- as far as I am concerned -- earned them. But they are effectively wealthy regarding potential consumption. (I am ignoring the headline recipients of ridiculously high pension, which are not as common as one might believe from headlines.

I haven't done any serious analysis or research on the one percent, but I am positive that it segregates into at least the top and bottom categories. The middle group -- who would include maybe 1/2 to 1 million families that have been lucky, likely accumulated their wealth over most of a life time, and may be elderly or close to elderly -- it is hard for me to get upset. The guys that make headlines are VERY unsympathetic. It is hard to believe that the moderately wealthy that makes the papers are representative of anything.

In spite of all this, tax everyone that has a higher income punitively. But me? That is the absolute line between greed and justice.

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