Piketty's challenge

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While reflecting on the success of Thomas Piketty, The Economist reports that "a new challenge to Mr Piketty's book has just appeared, and from an unexpected direction:" 26-year-old MIT grad student Matthew Rognlie. As the piece notes, "Rognlie mounts three main criticisms of [Piketty's] arguments:"

First, he argues that the rate of return from capital probably declines over the long run, rather than remaining high as Mr Piketty suggests, due to the law of diminishing marginal returns. [...]

Second, Mr Rognlie's research suggests that Mr Piketty has overestimated how high the returns on wealth are likely to be in the future. These should also decline over time, he reckons, unless it is very easy for the economy to substitute capital (like robots) for workers. Yet the historical evidence suggests that this is far harder than he suggests.

And third, Mr Rognlie finds that the growing share of national income deriving from capital income has not been distributed equally across all sectors. The return on non-housing wealth, in fact, has been remarkably stable since 1970 (see chart). Instead, surging house prices are almost entirely responsible for growing returns on capital.

Just how inconvenient Mr Rognlie's argument is for Mr Piketty's overarching narrative is a matter of perspective. The latter certainly did not make housing wealth the central theme of his bestselling book. But a story in which a privileged elite uses its political power (albeit through the planning system) to create economic rents for the few fits Mr Piketty's argument to a tee. Well-off homeowners may for the moment be more responsible for rising wealth inequality than top-hatted capitalists or famous hedge-fund managers. But their NIMBYism is a very Piketty-like phenomenon.

Rognlie's paper "Deciphering the fall and rise in the net capital share" is certainly worth reading:

Capital income is not growing unboundedly at the expense of labor, and further accumulation of capital in fact most likely means a fall in capital's share of total income - refuting one of the main theories of economist Thomas Piketty's popular book Capital in the 21st Century.

20150325-housing.png

As Brookings summarizes:

Piketty's Capital argues that the role of capital in the economy, after falling during the Depression and two world wars, is set to recover to the high levels of the 19th and early 20th centuries. According to Piketty, wealth will accumulate amid slowing economic growth to push up the capital-to-GDP ratio in the economy, which will then cause an increase in capital's share of income - and growing inequality.

In contrast, Rognlie finds that a rising capital-to-GDP ratio is most likely to result in a fall in capital's share of income, since the net rate of return on capital will fall by an even larger proportion than the capital-to-GDP ratio rises. Outside of housing, postwar changes in the value of the capital stock have not led to parallel changes in capital's share of income. In fact, the value of the capital stock relative to private income reached its highs in the late 1970s and early 1980s, when capital's share of income was near a low.

Meanwhile, in a move calculated to increase inequality, the GOP is still obsessed with cutting taxes for rich heirs because "the Republican Party is nothing if not dedicated to making sure millionaires pay the absolute minimum amount of money to the IRS:"

And truly, we're just talking about millionaires at this point. Currently, the government only taxes estates worth $5.43 million in the case of a deceased individual, or $10.86 million for a married couple--which impacts just the richest 0.2 percent of Americans, according to the Center on Budget Policy and Priorities. Fifteen years ago, when the tax kicked in around $675,000 per person, it only affected the wealthy. Now it only affects the super-wealthy.

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This page contains a single entry by cognitivedissident published on March 25, 2015 12:45 PM.

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