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We switched to EDT a few days ago. Very sad. But on my browsers the timestamps all correctly say EDT. Not sure what's going on with yours.
Where does Piketty argue that the returns on wealth are all reinvested? It seems to me that he argues only that the wealthy have savings rates higher on average than the average national savings rate - not that they reinvest 100% of their capital income.
I believe it's implied by Piketty's conclusions about the trajectory of the wealth-income ratio. But read the Summers review for more detail. In this post, I was addressing only the returns to capital as capital accumulates.
Summers is actually a little sloppy, or at least inconsistent, on this point. In the above he says "all reinvested" and just a few paragraphs down he says "largely reinvested." In neither case does he explain how he took that conclusion from Piketty's work.
I only skimmed the Summers review, will go through it in detail later, but while well written overall and appropriately calling out the relevant technical aspects of economics — most importantly, the elasticity of substitution — it's not a technical analysis of Piketty's findings so much as a disagreement about the policy consequences. That is, Piketty (and others) have spent years analyzing tax data in countries US, UK, and France (where it goes back to the late 18th century) and from that empirical (if imprecise) data draws a set of conclusions. Summers does not in any way question that, he instead posits, without equivalent empirical data, that in the modern US economy Piketty's conclusion does not hold. Summers could be right about this, or he could be wrong, but no one should be confused about that fact that Piketty has made the stronger argument and the burden will be on the profession (if not Summers himself) to disprove it.
He won't bother. Summers knows he is smarter than everybody else.
May stem from the different definition of capital in Piketty, to include a wider variety of things in "capital" than simply holdings of currency, specie, property, and paper. Piketty includes land and so on because there is a trajectory of wealth that seems to result in diversification of assets, making the assets harder to track in the historic record.
He has been wrong more often than right.
One point is that even after the capital share stabilizes at some level like 30%, inequality can continue to rise. Piketty's analysis in the rise of inequality, and greater concentration of wealth and wealth share of patrimonial wealth, doesn't depend on a continually rising capital share.
Summers argues that Piketty assumes "returns to wealth are all reinvested." But I don't believe that is correct. All that is required is that the patrimonial class saves at a significantly higher rate than the population as a whole for the patrimonial share of wealth to rise.
Relying on Summers to be right has proven to be a poor choice of strategy in pretty much all cases that immediately spring to mind.
I haven't seen anything in CitTFC about this 1:1 reinvestment that Summers says is assumed. One would think that Summers would have thought this point important enough to have quoted Piketty on the matter ;-)
But then again, what else has Summers got? He can speculate that the historical pattern may not hold in the future . . . but that's sort of like speculating that the speed of light, while constant until this instant, may assume a different value tomorrow. IOW, he's got nuthin'.
In these times, with very little real economic activity in the US,there is very little choice of investment, which is why so much of the accumulated wealth of the wealthy is parked in the stock market, creating phantom prosperity.
Anyway, I thought the job of the wealthy was to generate economic activity by innovating and investing. Instead they simply park their wealth and generate bubbles, waiting for someone else to do the hard work. Much better to tax their lazy rentier asses and distribute the money in the real economy where it'll generate real growth.
Begs the question, is there a threshold that can be determined, when enough capital is finally taken out of the economy, that g becomes entirely overwhelmed - as Kevin points out, the system breaks down.
I think both Kevin and Summers are wrong for any individual country because capital can flow across national borders to seek maximum return and G for any particular country can not. When Ford builds an auto plant in China, it doesn't increase G in the US at all, but assuming the venture to be profitable, the returns to Ford stock holders does increase.
I think the counter argument is that when there is a glut of capital (which more than a few people think we are in now) there is a reduction in r but there is also a reduction in g. That's pretty much where we are right now - reduced returns to capital and reduced growth rate.
Honestly, that's what the people that hold capital want - If their personal wealth does not grow faster than the economy in general, then everyone else is catching up. And I think that human beings act more out of status motivation than profit-maximizing motivation.
@DoctorJay: run don't walk to read Steve Randy Waldman's brilliant post on money as insurance on the Titanic:
Or: "I don't have to outrun the bear, I only have to outrun you."
How does that change the fact that income inequality has continuously risen since the 1980's? Piketty's thesis aside, we still have record or near record income inequality, no?
And I thought his thesis was that r (the return on capital - 4-5%) was greater than w (wage increases - 1.5%), not economic growth (g). Admittedly, I just got the book and haven't delved in yet so maybe I am wrong .
At what point is r considered excessive or to put it another way, what is the rate at which capital decreases its return and thus effectively eliminates the difference with g? Has this been measured?
r may not increase relative to g forever, but if the difference is great enough for long enough then the impact to inequality may still be relevant.
Why does r or g matter? G refers to growth, which is a good proxy for labor income. If that labor income goes to the rich then inequality will still increase even if r is negative
R and G growth matters. Because Piketty has shown that in unregulated capitalism R grows more then G and as a result inequality increases. So unless you want to live in a land with kings and queens you want at the very least regulated capitalism.
I don't know if you read the article but the question was what part of capitalism makes inequality increase. Piketty says it is a simple formula r>g, which by itsel is meanglesd because it says nothing over who benefits from r or g. In France where labor income is more equal then g might reduce inequality. In the US where labor income is very unequal then a high g can still add to inequality, making Piketty's comment on r and g irrelevant
The rich have more r then the poor; and are able to get more r then the poor could. So basically the only way for inequality not to increase is for government action, or I guess the poor could repeat the French revolution, but that sounds a bit extreme.
"sounds a bit extreme."
Less and less so as time crawls by...
It isn't that Piketty is stating the obvious; it's that he proves the obvious.
Same question I had coming to the comments. I am certainly no expert on economics, but it seems that the relevant role of government is to determine how these relationships impact the country, with tweaks to the laws that are allowing excessive capital accumulation when necessary - even if it's a "natural," self-correcting process, it shouldn't be allowed to undermine the middle class along the way to the next pendulum swing.
That's exactly my impression. In fact, I think this explains why conservatives are not attacking him on this rabidly, because that would admit that government intervention could remedy the situation, with all such actions being anathema to the current incarnation of conservativism.
Conservatives only seem non-rabid on this because they're off the chart on everything else, and they can't figure out a morality-based attack.
And Summers is a joke walking.
"The government" is not an independent entity, really, it's a game piece moved by complex political forces, which in the US, means mostly wealth.
The problem with this book is that it presupposes that all future wealth inequality will be in the hands of hereditary oligarchs who pass down their fortunes. A quick look at the richest people in the world today vs 10 years ago vs 20 years ago reveals that the people who actually make up the very rich are constantly changing.
Whn rich people die their estate pays estate taxes, then all of their wealth is divided up among their heirs which de facto reduces inequality.
All of the increase in inequality since WW II points to a inequality due to a divergence within labor income, not due to return on capital. For every Warren Buffet that has gotten rich from capital there are 10,000 doctors and law partners who have made large fortunes through labor.
A quick look at the richest people in the world today vs 10 years ago vs 20 years ago reveals that the people who actually make up the very rich are constantly changing.
But a "quick" look isn't very likely to be accurate, is it? A "quick" look will give us names of famous people who have made fortunes. One suspects a careful analysis will uncover lots of quietly held, inherited wealth.
Inherited wealth doesn't cause long term inequality because the meets act of inheriting dilutes it. My Grandpa died with 10 million bucks. I have 9 cousins and siblings who all got 500,000 grand after estate taxes. We in fact reduced inequality by inheriting that money
My Grandpa died with 10 million bucks. I have 9 cousins and siblings who all got 500,000 grand after estate taxes.
Your made up anecdote =/= policy analysis.
It isn't a policy analysis. It is a fact that splitting up fortunes reduces inequality
It is a fact that splitting up fortunes reduces inequality
No. What is a fact is that leaving large fortunes to one's heirs mitigates economic inequality far less that re-distributive taxation (especially inheritance taxation).
You're talking to someone whose idea of dealing with global warming is to recognize that we are all dead in the long run and so we should do nothing.
You contradict yourself by saying
1) it isn't a fact that splitting up wealth among heirs reduces inequality
2) it is a fact that splitting up heirs reduces inequality by less than taxation
Please state at your monitor for a few minutes before you comment again
You contradict yourself.
No I don't. You need to read more carefully.
You assume there is more than one heir, on average. You assume that the inheritance is divided equally, on average. Where is your evidence of this? Piketty's book is empirical. You can't counter his arguments with baseless speculation.
Picketty's book is more inference than empirical. Where does labor income go? Picketty is assuming that labor income reduces inequality (g) or growth, while capital income creates inequality (r).
That says nothing about who gets the labor income. Inequality had increased because rich people are getting a larger share of labor income, therefore his overly simplistic r>g formula is just that. Simplistic
You're trolling. I doubt you have read the book (I'm about a third of the way through). Have a nice day. And please try to spell the author's name correctly. There's no 'c' in Piketty.
You have another grandpa and so do your cousins. The reproductive rate for the upper class is that high on average. And $500K is what I'm am told I need to aim for to be able to retire. It is a pretty good starting point.
Now a true fact. I had a great aunt with no children of her own. Her sister, my grandmother, had three sons. The fortune went only to the oldest son and his family! The rest of us got nothing.
For every Warren Buffet that has gotten rich from capital there are 10,000 doctors and law partners who have made large fortunes through labor.
Well sure, but it's pretty unlikely any of those 10,000 has anywhere near Buffet's wealth.
Nobody doubts that highly educated people who earn high-percentile salaries can live well. But that still doesn't change the fact (if it's a fact) that inherited wealth is a big advantage, and that those possessing such advantages are in a position to tilt the scales further toward themselves.
But there is only 1 Warren Buffet, is the point. Inequality accross the entire economy is due to a larger share of labor income going to rich people, nothing to do with the return on capital
But there is only 1 Warren Buffet, is the point.
There are hundreds of billionaires in the US alone. Maybe a few thousand.
Yeah, and the vat majority of those billionaires made their money through labor income, not return on capital. Think Bill Gates inventing windows vs Warren Buffet investing money
Yeah, and the vat majority of those billionaires made their money through labor income, not return on capital.
Think Bill Gates inventing windows vs Warren Buffet investing money
People "think" Gates or Buffet because they're famous. You don't hear about the non-famous person who inherited a $300 million property portfolio in the late 90s and has now used the tax code to quietly reach the billion mark.
But inheritance itself reduces inequality since there are almost always multiple heirs. Picketty seems to be supposing that rich people only have single children or something because makes no assumptions about fortunes being split up.
If a guy inherits 300 million it was probably 1 billion to start with besides his dad died