Results for “piketty”
171 found

Depreciating Capital

Brad DeLong attacks Krusell and Smith for using in some of their thought experiments a depreciation rate of 10%, which is probably too high. Fair point but in my post I assumed a depreciation of just 5% and showed that Solow and Piketty give very different predictions about how the K/Y ratio will change with a change in g.

Furthermore, having read DeLong’s comment, I went to the BEA and compared gross and net domestic product which gives capital depreciation as a fraction of GDP of around 15% in recent decades. At a K/Y ratio of 4 that’s a depreciation rate of 3.75%. Similarly, Inklaar and Timmer in constructing capital stocks for the Penn World Tables estimate a depreciation rate for the U.S. of 4.1%. I reran my simple Excel chart with the lower number, 3.75%.

As you can see, the numbers are very similar to earlier and the key point is still that a decrease in g increases K/Y much more in the Piketty model than in the Solow model. Piketty2 Krusell responds to DeLong here making the additional point that their thought experiments show that Piketty’s assumption about savings is implausible at any depreciation rate (see also Hamilton on this point).

First: if the net rate of saving remains positive as the economy’s growth rate falls toward zero, as Piketty assumes in his second fundamental law of capitalism, the gross saving rate in the economy must approach 100%. This observation is a way of illustrating how unreasonable the behavioral assumptions underlying his theory of saving really are.

Second: according to standard, and much more reasonable, saving theory (based either on the standard textbook Solow growth model or on the permanent-income model), the net saving rate must fall with the rate of growth, and become zero when growth is zero.

…These points are key because Piketty’s predictions are all about what happens as growth falls during the 21st century, as he argues it will.

…both of these results hold no matter what the depreciation rate is (so long as it is positive).

The heart of Piketty’s theory is his expression for the capital share of income in the long run, α = r × s/g with the prediction that if g falls the capital share will rise tremendously. This is a good opportunity to summarize some of the recent points about the theory.

There are no contradictions but many a slip ‘twixt the cup and the lip. Namely, will g fall? If g does fall, will K/Y increase? If K/Y increases will capital’s share of income increase? My answers:

Will g fall? Uncertain. Piketty’s forecast is as good as anyone’s. My own view is that at the global level g has been increasing for several centuries and that this will continue, especially because in this century we will see a massive increase in the number of scientists and engineers as China and then India devote increased human capital to the research frontier.

If g does fall, will K/Y increase? Yes, but probably less than Piketty estimates and more in line with Solow.

If K/Y increases will capital’s share of income increase? Uncertain but more likely no than yes. It depends on the elasticity of substitution between K and L and as Rognlie and Summers argue, the elasticity that Piketty needs is higher than current estimates suggest is the case.

Assorted links

1. Good charts and graphs about U.S. energy history.

2. Scott Sumner on Piketty on Kuznets, and Scott on the first chapter of Piketty.

3. Are we sexist about hurricanes? (speculative)  The original paper is here.

4. A very optimistic view on the unemployment rate.

5. How loyal was the Chinese army? (significant)

6. David Brooks on Adam Phillips.

7. Benjamin Hermalin responds to my earlier discussion of his paper.  The original page for the paper is here.

Assorted links

1. How to earn money trolling dating sites for hot, thin white women (those new service sector jobs).

2. What are the most edited Wikipedia articles?  And a critique of the internet.

3. Immortal soccer fans.

4. A chess grandmaster examines Piketty’s claim about rates of return.  And Krugman on where the Piketty debate is at now.

5. Stephen Williamson is moving full-time to the St. Louis Fed…and will continue blogging.

6. The influence of economists on merger reviews.

Assorted links

1. Good Naidu essay on Piketty.  And a good Guardian piece on data discontinuities in Piketty.  More from Krusell and Smith, Piketty vs. modern macro theory.  Kevin Vallier on Piketty’s political philosophy.  Don Boudreaux reviews Piketty.  David Graeber does a mood affiliation take on Piketty.  And yet more mood affiliation on Piketty.

2. The economics of book festivals, an FT piece.

3. Tax policy and The Bible, by Bruce Bartlett.

4. E. Glen Weyl has a new paper summarizing price theory.

5. Not since 1952 have the puffins been so late.  And Art Carden is returning to EconLog.

6. A tale of two brothers, one of whom is rich.

How is income inequality correlated with wealth inequality?

From the OECD, Kaja Bonesmo Frederiksen writes on “More income inequality and less growth” and presents this table:


If you were to fit that with a curve, the overall slope would be negative, suggesting a negative empirical correlation between income inequality and wealth inequality.  Now do not leap to a conclusion here, as there are points to be made:

1. This scatter plot is not based on a model with adjustments for confounding factors.

2. These may not be the right or best data on wealth inequality.

3. There are not many data points on this graph in the first place.

4. Lots of other stuff.

The point is that everyone is talking about wealth inequality lately, yet it is not always recognized that the relationship between wealth and income inequality is complex, as illustrated for instance by the case of Sweden.  (There is nothing in this post by the way which should be construed as criticism of Piketty, I’m just trying to lay out some basic expository principles.)

Wealth inequality and income inequality may diverge for at least three reasons.  First, savings rates may differ across societies.  Second, locally available rates of return may differ.  Third, the ups and downs of mobility may mean high income inequality in a given year but overall lower levels of wealth inequality.

By the way, here is a good sentence from the abstract:

Wealth dispersion [inequality] is especially high in the United States and Sweden

The support document is here, I have reproduced Figure 3a.  Hat tip goes to Luis Pedro Coelho.

Assorted links

1. Scott Sumner on how to think about France.

2. Three revolutions from Miles Kimball.

3. Why the Germans are still in charge.  And Italy’s real problem, in one picture.

4. What is the longest disambiguation page on Wikipedia?

5. My 2011 column on driverless cars.

6. Asian small-clawed otters celebrate enrichment at the Smithsonian.

7. McArdle on Piketty.  And check out the cover (!).

8. Profile of Justin Wolfers.

Assorted links

1. The evolution of chess openings.  Chess openings have become more diverse over time.

2. Modular robots that double as furniture.

3. Piketty responds (again) to the FT.  And AFineTheorem on Piketty.  And knowhow, dark matter, and Piketty’s capital, from Ricardo Hausmann.  And me on Piketty on the radio, transcript.

4. Where to look for your lost mother.

5. Safety vest for chickens (there is no great stagnation).  And temporary tattoos hold cooking recipes for ready scrutiny.

6. Amazon responds on Hachette.

7. A Down Syndrome man searches for employment.

8. The World Bank shake-up doesn’t seem to be going well.

Assorted links

1. Clever birds figure out automatic door.

2. Japanese book on how to use profanity correctly in English.  And other methods of Japanese quality improvement.

3. Entropy and inequality (speculative, possibly downright dubious).

4. Why the European left is collapsing (speculative and overblown, but also makes some good points).

5. Why restitution should be small (a 2002 essay by me).

6. “Let’s, Like, Demolish Laundry.

7. More Galbraith on PikettyNate Silver on Piketty and data.

8. And very very sadly the Mackintosh library in Glasgow has been destroyed by fire.

“We all know that wealth inequality has gone up”

That is a response to the Piketty criticisms from Paul Krugman, and also mentioned by Matt Yglesias.  Phiip Pilkington also has a useful treatment.  This point however doesn’t do the trick as a defense.  Keep in mind that the “new and improved numbers,” as produced by Chris Giles, are showing doubts about the course of measured wealth inequality in the UK.  Maybe wealth inequality hasn’t gone up.

Now maybe that does “have to be wrong.”  But if the “new and improved” numbers are wrong, it is hard to then argue Piketty’s wealth inequality numbers can be trusted.  In which case we are back to knowing that income inequality has gone up, but not knowing so much concrete about wealth inequality.  (That is one reason why my own Average is Over focuses on income, and on labor income in particular, because that is where the main action has been.)  The data section of Piketty’s book, which has gathered so much praise, then is not so useful, though by no fault of Piketty’s.  We might think it likely that wealth inequality has gone up, but if we are going to do these selective overrides of the best available data, we cannot trust the data so much period or otherwise cite it with authority.  We also could not map wealth inequality into particular measures of the r vs. g gap at various periods of time.

If there is one big lesson of the FT/Piketty dust-up, it is that we don’t have reliable numbers on wealth inequality.

Now do we in fact “know” that wealth inequality has gone up?  See this piece by Allison Schrager.  Intuitions about wealth vs. income inequality are trickier than you might think.   And on what we actually do and do not know, here is a very good comment on Mian and Sufi’s blog (for U.S. data):

I very much appreciate that you did this, and it’s an interesting and important fact that you document here, but this does not directly respond to most of the discussion. As the extreme ratios seen here (on the order of ~20) indicate, the middle 20% has very little wealth compared to the top 20%, and this has always been true. I don’t think many conservative critics are trying to argue one way or another on this front.

The current discussion is more about the concentration of wealth at the very top, particularly the 1%. And there the SCF shows little to no evidence to support increased wealth inequality – only a minimal rise in the share of wealth held by the top 1%. This is what Kopczuk and Schrager’s article is referencing, and this is the most relevant question for the debate about Piketty’s (and Saez and Zucman’s) findings of higher wealth inequality at the top.

You really need to look at *that* issue, and if you think this is impossible because “the SCF is not a huge sample” (though it does oversample at the top), you need to say so, rather than passing off an interesting but essentially distinct point as being a decisive response to critics – which, frankly, is what you’re doing in this post.

I could not have said it better myself.

The inequality that matters

Brenda Cronin reports:

Recent hand-wringing about income inequality has focused on the gap between the top 1% and everyone else. A new paper argues that the more telling inequities exist among the 99%, primarily driven by education.

“The single-minded focus on the top 1% can be counterproductive given that the changes to the other 99% have been more economically significant,” says David Autor, a Massachusetts Institute of Technology economist and author of the study.

His paper, “Skills, Education and the Rise of Earnings Inequality Among the ‘Other 99 Percent’,” comes as something of riposte to French economist Thomas Piketty, whose bestselling “Capital in the 21st Century” has ignited sales and conversation around the world with its historical look at the fortunes of the top 1%.

Mr. Autor estimates that since the early 1980s, the earnings gap between workers with a high school degree and those with a college education has become four times greater than the shift in income during the same period to the very top from the 99%.

Between 1979 and 2012, the gap in median annual earnings between households of high-school educated workers and households with college-educated ones expanded from $30,298 to $58,249, or by roughly $28,000, Mr. Autor says. During the same period, he argues, 99% of households would have gained about $7,000 each, had they realized the amount of income that shifted during that time to the top 1%.

There is more here, including good graphs.

The other new French book on inequality

It is The Society of Equals, by Pierre Rosanvallon, and it is a transatlantic look at how the notion of inequality has changed over the last three centuries.  It strikes me as the sort of book Crooked Timber would have a symposium on.  Here is one good bit:

Thus there is a global rejection of society as it presently exists together with acceptance of the mechanisms that produce that society.  De facto inequalities are rejected, but the mechanisms that generate inequality in general are implicitly recognized.  I propose to call this situation, in which people deplore in general what they consent to in particular, the Bossuet paradox.  This paradox is the source of our contemporary schizophrenia.  It is not simply the result of a guilty error but has an epistemological dimension.  When we condemn global situations, we look at objective social facts, but we tend to relate particular situations to individual behaviors and choices.  The paradox is also related to the fact that moral and social judgments are based on the most visible and extreme situation (such as the gap between rich and poor), into which individuals project themselves abstract, whereas their personal behavior is concretely determined by narrower forms of justification.

Roger Berkowitz has a very good review here, excerpt:

As does Piketty, Rosanvallon employs philosophy and history to characterize the return of inequality in the late 20th and now 21st centuries. And Rosanvallon, again like Piketty, worries about the return of inequality. But Rosanvallon, unlike Piketty, argues that we need to understand how inequality and equality now are different than they used to be. As a result, Rosanvallon is much more sanguine about economic inequality and optimistic about the possibilities for meaningful equality in the future.


…inequality absent misery may not be the real problem of political justice. The reason so much inequality is greeted with resentment but acceptance, is that our current imagination of justice concerns visibility and singularity more than it does equality of income.