Tag Archives: piketty

Chart: It’s Never Been a Better Time to Be Rich

by ClaudetIun Posted on September 25, 2014

Mother Jones

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We’ll be posting a new chart on the current state of income inequality every day for the next couple of weeks. Yesterday’s chart looked at how the richest of the rich have enjoyed massive income gains for decades.

But wait, you say, isn’t that the way it’s always been? Yes and no. It’s never been a bad time to be rich in America. But some times have been a lot better. In fact, the best time may be now, especially when you consider the amount of total income controlled by the top 1 percent since colonial times (with ancient Rome thrown in for comparison):

Sources: Rome: Walter Scheidel and Steven J. Friesen; US in 1774 and 1860: Peter H. Lindert and Jeffrey G. Williamson; US in 1929-2012, Emmanuel Saez and Thomas Piketty (Excel)

Illustrations and infographic design by Mattias Macklerâ&#128;&#139;

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Chart: It’s Never Been a Better Time to Be Rich

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Thomas Piketty Says That r > g. But Is It, Really?

by CarleyFreehill Posted on May 14, 2014

Mother Jones

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I’ve mentioned before that I have a few misgivings about Thomas Piketty’s thesis in Capital in the 21st Century. One of my misgivings is pretty basic: Piketty argues that r (the return on capital) is historically greater than g (the economic growth rate). Since the rich own most of the capital, this means that the rich accumulate wealth faster than everyone else, which in turn means that rising income inequality is inevitable. But as capital accumulates, surely the return on capital should decline? After all, that’s what happens in every other market when there’s a glut of supply.

Piketty briefly addresses this objection, and concludes that although r will indeed decrease as capital accumulates, it won’t decrease much. But is that true? Larry Summers doesn’t think so:

Piketty’s rather fatalistic and certainly dismal view of capitalism can be challenged on two levels. It presumes, first, that the return to capital diminishes slowly, if at all, as wealth is accumulated and, second, that the returns to wealth are all reinvested. Whatever may have been the case historically, neither of these premises is likely correct as a guide to thinking about the American economy today.

Economists universally believe in the law of diminishing returns. As capital accumulates, the incremental return on an additional unit of capital declines. The crucial question goes to what is technically referred to as the elasticity of substitution….Piketty argues that the economic literature supports his assumption that returns diminish slowly (in technical parlance, that the elasticity of substitution is greater than 1), and so capital’s share rises with capital accumulation. But I think he misreads the literature by conflating gross and net returns to capital. It is plausible that as the capital stock grows, the increment of output produced declines slowly, but there can be no question that depreciation increases proportionally. And it is the return net of depreciation that is relevant for capital accumulation. I know of no study suggesting that measuring output in net terms, the elasticity of substitution is greater than 1, and I know of quite a few suggesting the contrary.

There are other objections to Piketty’s thesis, but it seems to me that this is one of the key criticisms—perhaps the key criticism. If r > g isn’t inevitably true, or even if it’s only slightly true (that is, r is only slightly greater than g), then everything falls apart. I suspect that this is going to be one of the main technical battlegrounds in the macro literature as Piketty’s theory gets hashed out over the next few years.

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Thomas Piketty Says That r > g. But Is It, Really?

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Is Rising Wealth Concentration Really an Inexorable Trend?

by CALKelseyngmd Posted on April 27, 2014

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Jared Bernstein tries to explain today why Thomas Piketty’s Capital in the 21st Century has become such a cultural phenomenon. The answer, he says, is a growing sense that “something is structurally wrong with both the economy and the practice of economics”:

Between financial bubbles and busts, the macro-management seems inept and even once the economy starts growing again, the benefits accrue narrowly to the top. In part, it’s a sense that “the fix is in” when it comes to the distribution of growth.

….Against that backdrop, we get a long, carefully researched tome with literally centuries of data across numerous countries showing a pretty inexorable trend of income and wealth concentration and providing a cogent analysis of the mechanics behind those dynamics. At the same time, though Piketty clearly knows his economics, he is quick to dismiss a knee-jerk elevation of assumption-based economic analysis that has led so many policy makers astray in recent years. Moreover, he is not a known partisan who can quickly be compartmentalized and thus distractingly plugged into the existing debate that tends to generate more heat than light.

This puzzles me, because it’s precisely what Piketty doesn’t show. Instead, what he shows is this:

For 1800 years, returns on capital were far higher than growth rates, but wealth concentration didn’t budge over the long term.
In the 19th century, an era marked by relative peace and the explosive growth of the Industrial Revolution, wealth concentration increased steadily, peaking in the Gilded Era.
In the 20th century, following the devastation of the Great Depression and World War II, wealth concentration declined.
Starting around 1980, wealth concentration started increasing again.

Now, Piketty does present good evidence to suggest that the post-1980 trend of rising wealth concentration is likely to continue. With the increasing financialization of the global economy, he believes that returns to capital will stay high; that low inheritance taxes will allow great fortunes to perpetuate themselves; and that sluggish economic growth will limit middle-class earnings gains. This dynamic will take a while to play out fully, but a century from now the relentless forces of r > g will produce a super-rich class with a far, far greater share of global wealth than they have today.

Now, Piketty may be right about this. I think the case he makes is a strong one. Nevertheless, the lesson I took from the book is that wealth concentration is highly variable. It bounces up and down over the centuries, increasing in certain places and eras, and then dissipating via war, famine, dissolute sons, lavish spending, expropriation, dispersion among heirs, disruptive technologies, and so forth. Right now, wealth concentration has been rising for a few decades, and that’s something worth grappling with for all the reasons Piketty lays out.

And yet, I can’t help thinking that on the time scales Piketty writes about, a few decades is a historical blip. There’s simply no “inexorable trend” visible in his data. Instead, there’s a highly speculative projection that the short-term trend of the past 30 years will continue for another century.

It might, but I wish more people would pay attention to just how speculative this is. Perhaps you think that war and expropriation and famine are no longer big threats to concentrated wealth. Perhaps dissolute sons all now have professional money managers and are less likely to squander huge family fortunes. Maybe middle-class wage growth is doomed to stagnate in a world dominated more and more by a highly-educated class managing complex technologies. Maybe disruptive technologies have gotten to the point where they benefit only the 1 percent, shifting wealth from one faction to another but never trickling down to the middle class. (I happen to find this scenario extremely likely, believing as I do that automation is likely to increase returns to capital and depress middle-class wage growth.)

I understand that I’m playing devil’s advocate here, especially since growing income inequality is a topic I write about frequently and I personally find it likely that Piketty is basically right. But I also recognize that his projections—of growth, of returns to capital, and of the persistence of dynastic wealth—are highly speculative. The past 30 years are hardly unique in human history, and previous waves of wealth concentration have not, in fact, lasted forever. I guess I wish that more people would at least acknowledge this. I feel like we should all be spending more time extending and refining Piketty’s results instead of simply assuming that he’s made a slam dunk case for the future of the economy.

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Is Rising Wealth Concentration Really an Inexorable Trend?

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Some Follow-Up Notes on Thomas Piketty’s "Capital in the 21st Century"

by SamualBuvelot Posted on April 10, 2014

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I’m a little reluctant to dive ever deeper into the weeds of Thomas Piketty’s Capital in the 21st Century since I’m woefully unqualified for the task. But I have a couple of follow-up comments that might be worthwhile. These are things I alluded to in my post on Tuesday but didn’t elaborate on.

First: As you know by now, Piketty’s primary argument is that, historically, r > g. That is, the return on capital is higher than economic growth, which means that owners of capital see their incomes grow faster than ordinary laborers. Since the rich own most of the capital, this means that the incomes of the rich naturally increase faster than the non-rich unless proactive steps are taken to stop it.

That’s fine. But take a look at the highlighted region in the chart on the right. The first set of points is for 1950-2012, a period in which r was about 0.5 percentage points less than g. The next set of points is a projection for 2012-2050, a period in which r is roughly 0.5 percentage points greater than g. This is not a big difference, especially considering the inherent noise in the data. Even if it’s correct, it means the next 40 years will see only small changes in the relative returns to capital and labor.

The real action is in the period 2050-2100, and it’s almost entirely dependent on Piketty’s projection that g will plummet by two full percentage points. Now, this might be correct. But keep in mind what’s going on here. Piketty’s main conclusion is (a) based on a projection more than 50 years in the future, which is inherently unreliable, and (b) primarily a guess that economic growth will plummet. So everything boils down to this: will global economic growth plummet during the period 2050-2100? I’d like to suggest that this is a very different question from the one most people are addressing in their reviews of Piketty.

Second: Another thing I mentioned on Tuesday is that if economic growth slows and capital stocks increase, then the return on capital should go down. Piketty acknowledges this—though not in the chart above—but contends that r will fall less than g. In technical terms, this all depends on the elasticity of substitution between capital and labor. However, over at Tyler Cowen’s blog, Matt Rognlie argues that Piketty is confusing gross and net production functions. If you account for depreciation, then the elasticity is such that r is likely to fall much faster than Piketty thinks as capital stocks increase and economic growth slows down.

I want to be clear that I can’t assess this independently. But it sounds plausible, and Cowen thinks it sounds plausible too. I’d very much like to hear Piketty or someone else address this.

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Some Follow-Up Notes on Thomas Piketty’s "Capital in the 21st Century"

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Thomas Piketty Has a Grim View of Our Plutocratic Future

by BobMoowattin Posted on January 29, 2014

Mother Jones

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A while back I mentioned Thomas Piketty’s new book, Capital in the 21st Century, which hasn’t yet made a big splash in the United States because the English translation won’t be out until March. But Thomas Edsall takes a look at reaction so far to Piketty’s thesis about the roots of rising income inequality and summarizes it this way:

Piketty proposes [] that the rise in inequality reflects markets working precisely as they should: “This has nothing to do with a market imperfection: the more perfect the capital market, the higher” the rate of return on capital is in comparison to the rate of growth of the economy. The higher this ratio is, the greater inequality is.

….There are a number of key arguments in Piketty’s book. One is that the six-decade period of growing equality in western nations — starting roughly with the onset of World War I and extending into the early 1970s — was unique and highly unlikely to be repeated. That period, Piketty suggests, represented an exception to the more deeply rooted pattern of growing inequality.

The chart on the right shows this graphically. For most of history, returns to capital were higher than the growth rate of the global economy, and this meant higher returns to owners of capital than to workers at large. And this means rising inequality. As a reviewer writes, “if capital incomes are more concentrated than incomes from labor (a rather uncontroversial fact), personal income distribution will also get more unequal — which indeed is what we have witnessed in the past 30 years.” The mid-20th century reversal of this trend was temporary and unlikely to be repeated.

One thing to be clear about, however, is that the right side of Piketty’s chart is a forecast. I’ve redrawn it with dashed red lines to make that clear. Piketty is predicting that returns to capital will exceed growth modestly over the next half century, and will gap out wildly in the half century after that. Edsall doesn’t really explain why Piketty believes this, so I guess we’ll have to wait for further reviews on that score. Speaking for myself, I’ll need some convincing. My view is that the second half of the 21st century—assuming we manage not to blow each other up or fry the planet to a cinder—is likely to be an era of fantastically high growth thanks to robotics and artificial intelligence. That also produces problems related to the distribution of income, but they’re rather different from Piketty’s.

But in one sense it doesn’t matter. Piketty’s solution to the problem of this mismatch between growth and capital returns—which he considers an inevitable consequence of capitalism—is redistribution and plenty of it: “The only way to halt this process, he argues, is to impose a global progressive tax on wealth….an annual graduated tax on stocks and bonds, property and other assets that are customarily not taxed until they are sold.” That’s probably the eventual answer to the robotics revolution too. So regardless of which fork we take in the future, higher taxes on the rich seem pretty likely.

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Thomas Piketty Has a Grim View of Our Plutocratic Future

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