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| Disputed term/author/ism | Author |
Entry |
Reference |
|---|---|---|---|
| Piketty | Economic Theories | Góes I 22 Piketty model/IMF/Góes(1): Piketty’s conclusion that inequality will increase in the future rests on the underlying assumption that, as growth decreases over time, driving the r − g spread to increase, capital-to-income ratios will increase. GoesVsPiketty: However, the results [from our testing models 2 an 3]* fail to show robust positive responses of capital share to shocks in r - g and cast doubt on Piketty’s conjecture. Elasticity: A possible reason for this is that Piketty could be underestimating diminishing returns of capital - thereby overestimating the elasticity of substitution between capital and labor, whose empirical estimates tend to be much lower than what he assumes (cf. Rognlie 2014)(1). Krusell and Smith: This relationship is illustrated in this paper by the negative median responses of r - g to positive capital share shocks. Another less emphasized but equally important problem with Piketty’s conjecture is highlighted by Krusell and Smith (2015)(2), who argue that Piketty’s predictions are grounded on a flawed theory of savings - namely, that the savings rate net of depreciation is constant - which exacerbates the expected increase in capital-to-income ratios as growth rates tend to zero. They present an alternative model in which agents maximize inter-temporal utility and arrive in a setting in which, on an optimal growth path, the savings rate is pro-cyclical. By showing that the savings rate responds negatively to negative growth shocks (which, in turn, are translated into positive r−g shocks) for at least 75% of the countries in the sample, the results of [our] Model 3* provide empirical support to Krusell and Smith’s analysis. Piketty: Piketty (2012(3)) says in his online notes: “with g = 0%, we’re back to Marx apocalyptic conclusions,” in which capital share goes to 100% and workers take home none of the output. GóesVsPiketty: While this is logically consistent with the model’s assumptions, empirically there seem to be endogenous forces preventing that: non-negligible diminishing returns on capital and pro-cyclical changes in the savings rate. These are two different ways in which the transmission mechanism from r − g to the capital share might get stuck: with the former, at the limit the rate of return on capital tends to zero and there is no dynamic transmission; with the latter, if growth approaches zero, the savings might ultimately become zero, offsetting any effect of lower growth on capital share. They are, however, fundamentally different: the first regards the production function and technological change, while the second has to do life-cycle behavior of capital owners. Inequality: Regarding inequality, the results from [our] Model 1* contradict Piketty’s prediction stating that following exogenous shocks in r − g inequality should increase. Acemoglu and Robinson: In fact, for at least 75% of the countries in the sample, the result is negative. These findings are in line with previous results by Acemoglu and Robinson (2015)(4), who found negative coefficients in single-equation panel models when regressing r −g on the share of the top 1%. This paper goes further, not only because the model takes all variables as endogenous, but also because it incorporates tax variability across countries. MilanovicVsAcemoglu: Additionally, by decomposing between common and idiosyncratic shocks, rather than using time dummies, Model 1 does not throw away potentially important information about the effect of structural forces (e.g., globalization) on these dynamics —which, as Milanovic (2014)(5) argues, is a problem with Acemoglu and Robinson’s analysis. The fact that a positive r − g spread does not lead to higher inequality is not necessarily surprising. Góes I 23 MankivVsPiketty: As illustrated by Mankiw (2015)(6) through a standard model that incorporates taxation and depreciation, even if r > g, one can arrive in a steady state inequality which does not evolve into an endless inegalitarian spiral. MilanovicVsPiketty: Milanovic (2017, forthcoming) explains that the transmission mechanism between r > g and higher income inequality requires all of the following conditions to hold: (a) savings rates have to be sufficiently high; (b) capital income needs to more unequally distributed than labor income; and (c) a high correlation between drawing capital income and being on the top of the income distribution. In a dynamic fashion, this paper shows that this mechanism is getting stuck because the negative responses of the savings rate to r - g shocks violate the first condition, thereby preventing higher levels inequality when compared to those observed before the increases in r - g. Since estimated dynamics do not confirm Piketty’s theory, observed income inequality in many advanced economies over the past decades are probably explained by factors other than the spread between r and g. In fact, there is evidence that recent inequality trends are not related to the distribution of national income between factors of production but primarily to the rising inequality of labor income (cf. Francese and Mulas-Granados 2015)(7). Indeed, there are many potential explanations for the rising labor income inequality - as, for instance: Dabla-Norris et al. (2015)(8), after evaluating cross-country evidence, find that past changes in inequality in advanced economies are associated the most with two labor market changes: higher skill premia and lower union membership rates. Jaumotte and Buitron (2015) also present results that correlate changes in labor market institutions, particularly lower union density, with increases in income inequality in advanced economies. Aghion et al. (2015)(9) suggest innovation plays a significant role. If innovators are rewarded with higher incomes due to a temporary technological advantage (in a Schumpeterian fashion), inequality would be exacerbated. The authors show that innovation explains about a fifth of the higher inequality observed in the U.S. since 1975. Mare (2016)(10) and Greenwood et al. (2012)(11) argue that changes in mating behavior helped exacerbate income inequality. The probability that someone will marry another person with a similar socio-educational background (labeled “assortative mating”) increased in tandem with the rise in income inequality in U.S. in the recent decades. The interaction between higher skill premia and higher assortative mating exacerbates household income inequality, because the gap between higher and lower earners became larger and couples became more segregated. Chong and Gradstein (2007)(12) use a dynamic panel to show inequality tends to decrease as institutional quality improves. The underlying logic is that if the basic rules of economic behavior are not symmetrically enforced, the rich will have a higher chance to extract economic rents, thereby increasing inequality. Acemoglu and Robinson (2015)(4) make a similar argument. They say that economic institutions affect the distribution of skills in society, indirectly determining inequality patterns. Piketty: Some years after the publication of Capital(13), Piketty (2015)(14) himself recognized the “rise in labor income inequality in recent decades has evidently little to do with r - g, and it is clearly a very important historical development.” He nonetheless emphasized that a higher r - g spread will be important and will exacerbate future inequality changes. GóesVsPiketty: However, the results in this paper show that this is likely not to be the case. The results corroborate the idea that recent inequality changes are not explained by r - g but also that new shocks to r − g will likely not lead to higher inequality, as there is no evidence that shocks to r - g increase income inequality. Combined, the observed endogenous dynamics of r - g and the share of the top 1% and the capital share, respectively, cast doubt on the reasonability of Piketty’s prediction about inequality trends. Góes I 24 GoesVsPiketty: I found no evidence to corroborate the idea that the r-g gap drives the capital share in national income. Savings/cyclicality: There are endogenous forces overlooked by Piketty - particularly the cyclicality of the savings rate - which balance out predicted large increases in the capital share. Inequality: On inequality, the evidence against Piketty’s predictions is even stronger: for at least 75% of the countries, the response of inequality to increases in r - g has the opposite sign to that postulated by Piketty. These results are robust to different calculations of r - g. Regardless of taking the real return on capital as long-term sovereign bond yields, short-term interest rates or implied returns from national accounting tables, the dynamics move in the same direction. Additionally, including or excluding taxes does not alter the qualitative takeaways from the results either. *For the models in detail see https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf Some basics for Piketty: >Cambridge Capital Controversy, >Geoffrey C. Harcourt, >Capital reversing, >Capital/Joan Robinson, >Exploitation/Robinson, >Reswitching/Robinson, >Reswitching/Sraffa, >Reswitching/Economic Theories, >Neo-Keynesianism, >Neo-Neoclassical Theories. 1. Rognlie, Matthew (2014). A note on Piketty and diminishing returns to capital. http://www.mit. edu/~mrognlie/piketty_diminishing_returns.pdf. Accessed: 11-Feb-2016. 2. Krusell, Per and Anthony Smith (2015). “Is Piketty’s ‘Second Law of Capitalism’ Fundamental?” In: Journal of Political Economy 123.4, pp. 725–748. doi: 10.1086/682574. 3. Piketty, Thomas (2012). ”Economics of Inequality. Course Notes: Models of Growth & Capital Accumulation. Is Balanced Growth Possible?”. http://piketty.pse.ens.fr/fr/teaching/10/25. Accessed: 11-Feb-2016. 4. Acemoglu, Daron and James A. Robinson (2015). “The Rise and Decline of General Laws of Capitalism”. In: Journal of Economic Perspectives 29.1, pp. 3–28. doi: 10.1257/jep.29.1.3. 5. Milanovic, Branko (2014). My take on the Acemoglu-Robinson critique of Piketty. http://glineq. blogspot.com/2014/08/my-take-on-acemoglu-robinson-critique.html. Accessed: 11-Feb2016. 6. Mankiw, Greg (2015). “Yes, r > g. So What?” In: American Economic Review: Papers & Proceedings 105.5, pp. 43–47. doi: 10.1257/aer.p20151059. 7. Francese, Maura and Carlos Mulas-Granados (2015). Functional Income Distribution and Its Role in Explaining Inequality. IMF Working Paper 15/244. International Monetary Fund. doi: 10. 5089/9781513549828.001. 8. Dabla-Norris, Era et al. (2015). Causes and Consequences of Income Inequality: A Global Perspective. IMF Staff Discussion Note 15/13. International Monetary Fund. doi: 10.5089/9781513555188.006. 9. Aghion, Philippe et al. (2015). Innovation and Top Income Inequality. Working Paper 21247. National Bureau of Economic Research. doi: 10.3386/w21247. 10. Mare, Robert D. (2016). “Educational Homogamy in Two Gilded Ages: Evidence from Inter-generational Social Mobility Data”. In: The ANNALS of the American Academy of Political and Social Science 663.1, pp. 117–139. doi: 10.1177/0002716215596967. 11. Greenwood, Jeremy et al. (2012). Technology and the Changing Family: A Unified Model of Marriage, Divorce, Educational Attainment and Married Female Labor-Force Participation. Working Paper 17735. National Bureau of Economic Research. doi: 10.3386/w17735. 12. Chong, Alberto and Mark Gradstein (2007). “Inequality and Institutions”. In: The Review of Economics and Statistics 89.3, pp. 454–465. doi: 10.1162/rest.89.3.454. 13. Piketty, T. (2014), Capital in the 21st Century, Cambridge, MA: Belknap 14. Piketty, T. About Capital in the Twenty-First Century American Economic Review vol. 105, no. 5, May 2015(pp. 48–53) Carlos Góes. 2016. Testing Piketty’s Hypothesis on the Drivers of Income Inequality: Evidence from Panel VARs with Heterogeneous Dynamics. IMF Working Paper WP16/160 https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf |
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| Piketty Hypothesis | Economic Theories | Góes I 22 Piketty model/IMF/Góes(1): Piketty’s conclusion that inequality will increase in the future rests on the underlying assumption that, as growth decreases over time, driving the r − g spread to increase, capital-to-income ratios will increase. GoesVsPiketty: However, the results [from our testing models 2 an 3]* fail to show robust positive responses of capital share to shocks in r - g and cast doubt on Piketty’s conjecture. Elasticity: A possible reason for this is that Piketty could be underestimating diminishing returns of capital - thereby overestimating the elasticity of substitution between capital and labor, whose empirical estimates tend to be much lower than what he assumes (cf. Rognlie 2014)(1). Krusell and Smith: This relationship is illustrated in this paper by the negative median responses of r - g to positive capital share shocks. Another less emphasized but equally important problem with Piketty’s conjecture is highlighted by Krusell and Smith (2015)(2), who argue that Piketty’s predictions are grounded on a flawed theory of savings - namely, that the savings rate net of depreciation is constant - which exacerbates the expected increase in capital-to-income ratios as growth rates tend to zero. They present an alternative model in which agents maximize inter-temporal utility and arrive in a setting in which, on an optimal growth path, the savings rate is pro-cyclical. By showing that the savings rate responds negatively to negative growth shocks (which, in turn, are translated into positive r−g shocks) for at least 75% of the countries in the sample, the results of [our] Model 3* provide empirical support to Krusell and Smith’s analysis. Piketty: Piketty (2012(3)) says in his online notes: “with g = 0%, we’re back to Marx apocalyptic conclusions,” in which capital share goes to 100% and workers take home none of the output. GóesVsPiketty: While this is logically consistent with the model’s assumptions, empirically there seem to be endogenous forces preventing that: non-negligible diminishing returns on capital and pro-cyclical changes in the savings rate. These are two different ways in which the transmission mechanism from r − g to the capital share might get stuck: with the former, at the limit the rate of return on capital tends to zero and there is no dynamic transmission; with the latter, if growth approaches zero, the savings might ultimately become zero, offsetting any effect of lower growth on capital share. They are, however, fundamentally different: the first regards the production function and technological change, while the second has to do life-cycle behavior of capital owners. Inequality: Regarding inequality, the results from [our] Model 1* contradict Piketty’s prediction stating that following exogenous shocks in r − g inequality should increase. Acemoglu and Robinson: In fact, for at least 75% of the countries in the sample, the result is negative. These findings are in line with previous results by Acemoglu and Robinson (2015)(4), who found negative coefficients in single-equation panel models when regressing r −g on the share of the top 1%. This paper goes further, not only because the model takes all variables as endogenous, but also because it incorporates tax variability across countries. MilanovicVsAcemoglu: Additionally, by decomposing between common and idiosyncratic shocks, rather than using time dummies, Model 1 does not throw away potentially important information about the effect of structural forces (e.g., globalization) on these dynamics —which, as Milanovic (2014)(5) argues, is a problem with Acemoglu and Robinson’s analysis. The fact that a positive r − g spread does not lead to higher inequality is not necessarily surprising. Góes I 23 MankivVsPiketty: As illustrated by Mankiw (2015)(6) through a standard model that incorporates taxation and depreciation, even if r > g, one can arrive in a steady state inequality which does not evolve into an endless inegalitarian spiral. MilanovicVsPiketty: Milanovic (2017, forthcoming) explains that the transmission mechanism between r > g and higher income inequality requires all of the following conditions to hold: (a) savings rates have to be sufficiently high; (b) capital income needs to more unequally distributed than labor income; and (c) a high correlation between drawing capital income and being on the top of the income distribution. In a dynamic fashion, this paper shows that this mechanism is getting stuck because the negative responses of the savings rate to r - g shocks violate the first condition, thereby preventing higher levels inequality when compared to those observed before the increases in r - g. Since estimated dynamics do not confirm Piketty’s theory, observed income inequality in many advanced economies over the past decades are probably explained by factors other than the spread between r and g. In fact, there is evidence that recent inequality trends are not related to the distribution of national income between factors of production but primarily to the rising inequality of labor income (cf. Francese and Mulas-Granados 2015)(7). Indeed, there are many potential explanations for the rising labor income inequality - as, for instance: Dabla-Norris et al. (2015)(8), after evaluating cross-country evidence, find that past changes in inequality in advanced economies are associated the most with two labor market changes: higher skill premia and lower union membership rates. Jaumotte and Buitron (2015) also present results that correlate changes in labor market institutions, particularly lower union density, with increases in income inequality in advanced economies. Aghion et al. (2015)(9) suggest innovation plays a significant role. If innovators are rewarded with higher incomes due to a temporary technological advantage (in a Schumpeterian fashion), inequality would be exacerbated. The authors show that innovation explains about a fifth of the higher inequality observed in the U.S. since 1975. Mare (2016)(10) and Greenwood et al. (2012)(11) argue that changes in mating behavior helped exacerbate income inequality. The probability that someone will marry another person with a similar socio-educational background (labeled “assortative mating”) increased in tandem with the rise in income inequality in U.S. in the recent decades. The interaction between higher skill premia and higher assortative mating exacerbates household income inequality, because the gap between higher and lower earners became larger and couples became more segregated. Chong and Gradstein (2007)(12) use a dynamic panel to show inequality tends to decrease as institutional quality improves. The underlying logic is that if the basic rules of economic behavior are not symmetrically enforced, the rich will have a higher chance to extract economic rents, thereby increasing inequality. Acemoglu and Robinson (2015)(4) make a similar argument. They say that economic institutions affect the distribution of skills in society, indirectly determining inequality patterns. Piketty: Some years after the publication of Capital(13), Piketty (2015)(14) himself recognized the “rise in labor income inequality in recent decades has evidently little to do with r - g, and it is clearly a very important historical development.” He nonetheless emphasized that a higher r - g spread will be important and will exacerbate future inequality changes. GóesVsPiketty: However, the results in this paper show that this is likely not to be the case. The results corroborate the idea that recent inequality changes are not explained by r - g but also that new shocks to r − g will likely not lead to higher inequality, as there is no evidence that shocks to r - g increase income inequality. Combined, the observed endogenous dynamics of r - g and the share of the top 1% and the capital share, respectively, cast doubt on the reasonability of Piketty’s prediction about inequality trends. Góes I 24 GoesVsPiketty: I found no evidence to corroborate the idea that the r-g gap drives the capital share in national income. Savings/cyclicality: There are endogenous forces overlooked by Piketty - particularly the cyclicality of the savings rate - which balance out predicted large increases in the capital share. Inequality: On inequality, the evidence against Piketty’s predictions is even stronger: for at least 75% of the countries, the response of inequality to increases in r - g has the opposite sign to that postulated by Piketty. These results are robust to different calculations of r - g. Regardless of taking the real return on capital as long-term sovereign bond yields, short-term interest rates or implied returns from national accounting tables, the dynamics move in the same direction. Additionally, including or excluding taxes does not alter the qualitative takeaways from the results either. *For the models in detail see https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf Some basics for Piketty: >Cambridge Capital Controversy, >Geoffrey C. Harcourt, >Capital reversing, >Capital/Joan Robinson, >Exploitation/Robinson, >Reswitching/Robinson, >Reswitching/Sraffa, >Reswitching/Economic Theories, >Neo-Keynesianism, >Neo-Neoclassical Theories. 1. Rognlie, Matthew (2014). A note on Piketty and diminishing returns to capital. http://www.mit. edu/~mrognlie/piketty_diminishing_returns.pdf. Accessed: 11-Feb-2016. 2. Krusell, Per and Anthony Smith (2015). “Is Piketty’s ‘Second Law of Capitalism’ Fundamental?” In: Journal of Political Economy 123.4, pp. 725–748. doi: 10.1086/682574. 3. Piketty, Thomas (2012). ”Economics of Inequality. Course Notes: Models of Growth & Capital Accumulation. Is Balanced Growth Possible?”. http://piketty.pse.ens.fr/fr/teaching/10/25. Accessed: 11-Feb-2016. 4. Acemoglu, Daron and James A. Robinson (2015). “The Rise and Decline of General Laws of Capitalism”. In: Journal of Economic Perspectives 29.1, pp. 3–28. doi: 10.1257/jep.29.1.3. 5. Milanovic, Branko (2014). My take on the Acemoglu-Robinson critique of Piketty. http://glineq. blogspot.com/2014/08/my-take-on-acemoglu-robinson-critique.html. Accessed: 11-Feb2016. 6. Mankiw, Greg (2015). “Yes, r > g. So What?” In: American Economic Review: Papers & Proceedings 105.5, pp. 43–47. doi: 10.1257/aer.p20151059. 7. Francese, Maura and Carlos Mulas-Granados (2015). Functional Income Distribution and Its Role in Explaining Inequality. IMF Working Paper 15/244. International Monetary Fund. doi: 10. 5089/9781513549828.001. 8. Dabla-Norris, Era et al. (2015). Causes and Consequences of Income Inequality: A Global Perspective. IMF Staff Discussion Note 15/13. International Monetary Fund. doi: 10.5089/9781513555188.006. 9. Aghion, Philippe et al. (2015). Innovation and Top Income Inequality. Working Paper 21247. National Bureau of Economic Research. doi: 10.3386/w21247. 10. Mare, Robert D. (2016). “Educational Homogamy in Two Gilded Ages: Evidence from Inter-generational Social Mobility Data”. In: The ANNALS of the American Academy of Political and Social Science 663.1, pp. 117–139. doi: 10.1177/0002716215596967. 11. Greenwood, Jeremy et al. (2012). Technology and the Changing Family: A Unified Model of Marriage, Divorce, Educational Attainment and Married Female Labor-Force Participation. Working Paper 17735. National Bureau of Economic Research. doi: 10.3386/w17735. 12. Chong, Alberto and Mark Gradstein (2007). “Inequality and Institutions”. In: The Review of Economics and Statistics 89.3, pp. 454–465. doi: 10.1162/rest.89.3.454. 13. Piketty, T. (2014), Capital in the 21st Century, Cambridge, MA: Belknap 14. Piketty, T. About Capital in the Twenty-First Century American Economic Review vol. 105, no. 5, May 2015(pp. 48–53) Carlos Góes. 2016. Testing Piketty’s Hypothesis on the Drivers of Income Inequality: Evidence from Panel VARs with Heterogeneous Dynamics. IMF Working Paper WP16/160 https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf |
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| Piketty Hypothesis | Góes | Góes I 22 Piketty model/IMF/Góes(1): Piketty’s conclusion that inequality will increase in the future rests on the underlying assumption that, as growth decreases over time, driving the r − g spread to increase, capital-to-income ratios will increase. GoesVsPiketty: However, the results [from our testing models 2 an 3]* fail to show robust positive responses of capital share to shocks in r - g and cast doubt on Piketty’s conjecture. Elasticity: A possible reason for this is that Piketty could be underestimating diminishing returns of capital - thereby overestimating the elasticity of substitution between capital and labor, whose empirical estimates tend to be much lower than what he assumes (cf. Rognlie 2014)(1). Krusell and Smith: This relationship is illustrated in this paper by the negative median responses of r - g to positive capital share shocks. Another less emphasized but equally important problem with Piketty’s conjecture is highlighted by Krusell and Smith (2015)(2), who argue that Piketty’s predictions are grounded on a flawed theory of savings - namely, that the savings rate net of depreciation is constant - which exacerbates the expected increase in capital-to-income ratios as growth rates tend to zero. They present an alternative model in which agents maximize inter-temporal utility and arrive in a setting in which, on an optimal growth path, the savings rate is pro-cyclical. By showing that the savings rate responds negatively to negative growth shocks (which, in turn, are translated into positive r−g shocks) for at least 75% of the countries in the sample, the results of [our] Model 3* provide empirical support to Krusell and Smith’s analysis. Piketty: Piketty (2012(3)) says in his online notes: “with g = 0%, we’re back to Marx apocalyptic conclusions,” in which capital share goes to 100% and workers take home none of the output. GóesVsPiketty: While this is logically consistent with the model’s assumptions, empirically there seem to be endogenous forces preventing that: non-negligible diminishing returns on capital and pro-cyclical changes in the savings rate. These are two different ways in which the transmission mechanism from r − g to the capital share might get stuck: with the former, at the limit the rate of return on capital tends to zero and there is no dynamic transmission; with the latter, if growth approaches zero, the savings might ultimately become zero, offsetting any effect of lower growth on capital share. They are, however, fundamentally different: the first regards the production function and technological change, while the second has to do life-cycle behavior of capital owners. Inequality: Regarding inequality, the results from [our] Model 1* contradict Piketty’s prediction stating that following exogenous shocks in r − g inequality should increase. Acemoglu and Robinson: In fact, for at least 75% of the countries in the sample, the result is negative. These findings are in line with previous results by Acemoglu and Robinson (2015)(4), who found negative coefficients in single-equation panel models when regressing r −g on the share of the top 1%. This paper goes further, not only because the model takes all variables as endogenous, but also because it incorporates tax variability across countries. MilanovicVsAcemoglu: Additionally, by decomposing between common and idiosyncratic shocks, rather than using time dummies, Model 1 does not throw away potentially important information about the effect of structural forces (e.g., globalization) on these dynamics —which, as Milanovic (2014)(5) argues, is a problem with Acemoglu and Robinson’s analysis. The fact that a positive r − g spread does not lead to higher inequality is not necessarily surprising. Góes I 23 MankivVsPiketty: As illustrated by Mankiw (2015)(6) through a standard model that incorporates taxation and depreciation, even if r > g, one can arrive in a steady state inequality which does not evolve into an endless inegalitarian spiral. MilanovicVsPiketty: Milanovic (2017, forthcoming) explains that the transmission mechanism between r > g and higher income inequality requires all of the following conditions to hold: (a) savings rates have to be sufficiently high; (b) capital income needs to more unequally distributed than labor income; and (c) a high correlation between drawing capital income and being on the top of the income distribution. In a dynamic fashion, this paper shows that this mechanism is getting stuck because the negative responses of the savings rate to r - g shocks violate the first condition, thereby preventing higher levels inequality when compared to those observed before the increases in r - g. Since estimated dynamics do not confirm Piketty’s theory, observed income inequality in many advanced economies over the past decades are probably explained by factors other than the spread between r and g. In fact, there is evidence that recent inequality trends are not related to the distribution of national income between factors of production but primarily to the rising inequality of labor income (cf. Francese and Mulas-Granados 2015)(7). Indeed, there are many potential explanations for the rising labor income inequality - as, for instance: Dabla-Norris et al. (2015)(8), after evaluating cross-country evidence, find that past changes in inequality in advanced economies are associated the most with two labor market changes: higher skill premia and lower union membership rates. Jaumotte and Buitron (2015) also present results that correlate changes in labor market institutions, particularly lower union density, with increases in income inequality in advanced economies. Aghion et al. (2015)(9) suggest innovation plays a significant role. If innovators are rewarded with higher incomes due to a temporary technological advantage (in a Schumpeterian fashion), inequality would be exacerbated. The authors show that innovation explains about a fifth of the higher inequality observed in the U.S. since 1975. Mare (2016)(10) and Greenwood et al. (2012)(11) argue that changes in mating behavior helped exacerbate income inequality. The probability that someone will marry another person with a similar socio-educational background (labeled “assortative mating”) increased in tandem with the rise in income inequality in U.S. in the recent decades. The interaction between higher skill premia and higher assortative mating exacerbates household income inequality, because the gap between higher and lower earners became larger and couples became more segregated. Chong and Gradstein (2007)(12) use a dynamic panel to show inequality tends to decrease as institutional quality improves. The underlying logic is that if the basic rules of economic behavior are not symmetrically enforced, the rich will have a higher chance to extract economic rents, thereby increasing inequality. Acemoglu and Robinson (2015)(4) make a similar argument. They say that economic institutions affect the distribution of skills in society, indirectly determining inequality patterns. Piketty: Some years after the publication of Capital(13), Piketty (2015)(14) himself recognized the “rise in labor income inequality in recent decades has evidently little to do with r - g, and it is clearly a very important historical development.” He nonetheless emphasized that a higher r - g spread will be important and will exacerbate future inequality changes. GóesVsPiketty: However, the results in this paper show that this is likely not to be the case. The results corroborate the idea that recent inequality changes are not explained by r - g but also that new shocks to r − g will likely not lead to higher inequality, as there is no evidence that shocks to r - g increase income inequality. Combined, the observed endogenous dynamics of r - g and the share of the top 1% and the capital share, respectively, cast doubt on the reasonability of Piketty’s prediction about inequality trends. Góes I 24 GoesVsPiketty: I found no evidence to corroborate the idea that the r-g gap drives the capital share in national income. Savings/cyclicality: There are endogenous forces overlooked by Piketty - particularly the cyclicality of the savings rate - which balance out predicted large increases in the capital share. Inequality: On inequality, the evidence against Piketty’s predictions is even stronger: for at least 75% of the countries, the response of inequality to increases in r - g has the opposite sign to that postulated by Piketty. These results are robust to different calculations of r - g. Regardless of taking the real return on capital as long-term sovereign bond yields, short-term interest rates or implied returns from national accounting tables, the dynamics move in the same direction. Additionally, including or excluding taxes does not alter the qualitative takeaways from the results either. *For the models in detail see https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf Some basics for Piketty: >Cambridge Capital Controversy, >Geoffrey C. Harcourt, >Capital reversing, >Capital/Joan Robinson, >Exploitation/Robinson, >Reswitching/Robinson, >Reswitching/Sraffa, >Reswitching/Economic Theories, >Neo-Keynesianism, >Neo-Neoclassical Theories. 1. Rognlie, Matthew (2014). A note on Piketty and diminishing returns to capital. http://www.mit. edu/~mrognlie/piketty_diminishing_returns.pdf. Accessed: 11-Feb-2016. 2. Krusell, Per and Anthony Smith (2015). “Is Piketty’s ‘Second Law of Capitalism’ Fundamental?” In: Journal of Political Economy 123.4, pp. 725–748. doi: 10.1086/682574. 3. Piketty, Thomas (2012). ”Economics of Inequality. Course Notes: Models of Growth & Capital Accumulation. Is Balanced Growth Possible?”. http://piketty.pse.ens.fr/fr/teaching/10/25. Accessed: 11-Feb-2016. 4. Acemoglu, Daron and James A. Robinson (2015). “The Rise and Decline of General Laws of Capitalism”. In: Journal of Economic Perspectives 29.1, pp. 3–28. doi: 10.1257/jep.29.1.3. 5. Milanovic, Branko (2014). My take on the Acemoglu-Robinson critique of Piketty. http://glineq. blogspot.com/2014/08/my-take-on-acemoglu-robinson-critique.html. Accessed: 11-Feb2016. 6. Mankiw, Greg (2015). “Yes, r > g. So What?” In: American Economic Review: Papers & Proceedings 105.5, pp. 43–47. doi: 10.1257/aer.p20151059. 7. Francese, Maura and Carlos Mulas-Granados (2015). Functional Income Distribution and Its Role in Explaining Inequality. IMF Working Paper 15/244. International Monetary Fund. doi: 10. 5089/9781513549828.001. 8. Dabla-Norris, Era et al. (2015). Causes and Consequences of Income Inequality: A Global Perspective. IMF Staff Discussion Note 15/13. International Monetary Fund. doi: 10.5089/9781513555188.006. 9. Aghion, Philippe et al. (2015). Innovation and Top Income Inequality. Working Paper 21247. National Bureau of Economic Research. doi: 10.3386/w21247. 10. Mare, Robert D. (2016). “Educational Homogamy in Two Gilded Ages: Evidence from Inter-generational Social Mobility Data”. In: The ANNALS of the American Academy of Political and Social Science 663.1, pp. 117–139. doi: 10.1177/0002716215596967. 11. Greenwood, Jeremy et al. (2012). Technology and the Changing Family: A Unified Model of Marriage, Divorce, Educational Attainment and Married Female Labor-Force Participation. Working Paper 17735. National Bureau of Economic Research. doi: 10.3386/w17735. 12. Chong, Alberto and Mark Gradstein (2007). “Inequality and Institutions”. In: The Review of Economics and Statistics 89.3, pp. 454–465. doi: 10.1162/rest.89.3.454. 13. Piketty, T. (2014), Capital in the 21st Century, Cambridge, MA: Belknap 14. Piketty, T. About Capital in the Twenty-First Century American Economic Review vol. 105, no. 5, May 2015(pp. 48–53) Carlos Góes. 2016. Testing Piketty’s Hypothesis on the Drivers of Income Inequality: Evidence from Panel VARs with Heterogeneous Dynamics. IMF Working Paper WP16/160 https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf |
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| Savings Rate | Economic Theories | Góes I 22 Savings rate/Piketty-Model/Economic theories: (…) Another less emphasized but equally important problem with Piketty’s conjecture is highlighted by Krusell and Smith (2015)(1), who argue that Piketty’s predictions are grounded on a flawed theory of savings - namely, that the savings rate net of depreciation is constant - which exacerbates the expected increase in capital-to-income ratios as growth rates tend to zero. They present an alternative model in which agents maximize inter-temporal utility and arrive in a setting in which, on an optimal growth path, the savings rate is pro-cyclical. By showing that the savings rate responds negatively to negative growth shocks (which, in turn, are translated into positive r−g shocks) for at least 75% of the countries in the sample, the results of [our] Model 3* provide empirical support to Krusell and Smith’s analysis. Piketty: Piketty (2012(2)) says in his online notes: “with g = 0%, we’re back to Marx apocalyptic conclusions,” in which capital share goes to 100% and workers take home none of the output. GóesVsPiketty: While this is logically consistent with the model’s assumptions, empirically there seem to be endogenous forces preventing that: non-negligible diminishing returns on capital and pro-cyclical changes in the savings rate. These are two different ways in which the transmission mechanism from r − g to the capital share might get stuck: with the former, at the limit the rate of return on capital tends to zero and there is no dynamic transmission; with the latter, if growth approaches zero, the savings might ultimately become zero, offsetting any effect of lower growth on capital share. They are, however, fundamentally different: the first regards the production function and technological change, while the second has to do life-cycle behavior of capital owners. Inequality: Regarding inequality, the results from [our] Model 1 contradict Piketty’s prediction stating that following exogenous shocks in r − g inequality should increase. Acemoglu and Robinson: In fact, for at least 75% of the countries in the sample, the result is negative. These findings are in line with previous results by Acemoglu and Robinson (2015)(3), who found negative coefficients in single-equation panel models when regressing r −g on the share of the top 1%. This paper goes further, not only because the model takes all variables as endogenous, but also because it incorporates tax variability across countries. MilanovicVsAcemoglu: Additionally, by decomposing between common and idiosyncratic shocks, rather than using time dummies, Model 1* does not throw away potentially important information about the effect of structural forces (e.g., globalization) on these dynamics —which, as Milanovic (2014)(4) argues, is a problem with Acemoglu and Robinson’s analysis. The fact that a positive r − g spread does not lead to higher inequality is not necessarily surprising. Góes I 23 MankivVsPiketty: As illustrated by Mankiw (2015)(5) through a standard model that incorporates taxation and depreciation, even if r > g, one can arrive in a steady state inequality which does not evolve into an endless inegalitarian spiral. MilanovicVsPiketty: Milanovic (2017, forthcoming) explains that the transmission mechanism between r > g and higher income inequality requires all of the following conditions to hold: (a) savings rates have to be sufficiently high; (b) capital income needs to more unequally distributed than labor income; and (c) a high correlation between drawing capital income and being on the top of the income distribution. In a dynamic fashion, this paper shows that this mechanism is getting stuck because the negative responses of the savings rate to r - g shocks violate the first condition, thereby preventing higher levels inequality when compared to those observed before the increases in r - g. Since estimated dynamics do not confirm Piketty’s theory, observed income inequality in many advanced economies over the past decades are probably explained by factors other than the spread between r and g. Góes I 24 Savings/cyclicality: There are endogenous forces overlooked by Piketty - particularly the cyclicality of the savings rate - which balance out predicted large increases in the capital share. Inequality: On inequality, the evidence against Piketty’s predictions is even stronger: for at least 75% of the countries, the response of inequality to increases in r - g has the opposite sign to that postulated by Piketty. These results are robust to different calculations of r - g. Regardless of taking the real return on capital as long-term sovereign bond yields, short-term interest rates or implied returns from national accounting tables, the dynamics move in the same direction. Additionally, including or excluding taxes does not alter the qualitative takeaways from the results either. *For the models in detail see https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf 1. Krusell, Per and Anthony Smith (2015). “Is Piketty’s ‘Second Law of Capitalism’ Fundamental?” In: Journal of Political Economy 123.4, pp. 725–748. doi: 10.1086/682574. 2. Piketty, Thomas (2012). ”Economics of Inequality. Course Notes: Models of Growth & Capital Accumulation. Is Balanced Growth Possible?”. http://piketty.pse.ens.fr/fr/teaching/10/25. Accessed: 11-Feb-2016. 3. Acemoglu, Daron and James A. Robinson (2015). “The Rise and Decline of General Laws of Capitalism”. In: Journal of Economic Perspectives 29.1, pp. 3–28. doi: 10.1257/jep.29.1.3. 4. Milanovic, Branko (2014). My take on the Acemoglu-Robinson critique of Piketty. http://glineq. blogspot.com/2014/08/my-take-on-acemoglu-robinson-critique.html. Accessed: 11-Feb2016. 5. Mankiw, Greg (2015). “Yes, r > g. So What?” In: American Economic Review: Papers & Proceedings 105.5, pp. 43–47. doi: 10.1257/aer.p20151059. Carlos Góes. 2016. Testing Piketty’s Hypothesis on the Drivers of Income Inequality: Evidence from Panel VARs with Heterogeneous Dynamics. IMF Working Paper WP16/160 https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf |
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