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The author or concept searched is found in the following 10 entries.
| Disputed term/author/ism | Author |
Entry |
Reference |
|---|---|---|---|
| Distribution Theory | Piketty | Bofinger I 39 Distribution theory/distribution/Piketty/Krämer: With the exception of the explanation of top managers' incomes, Piketty considers the neoclassical marginal productivity theory of distribution to be “useful” and “natural” when explaining wages and profits (Piketty 2014: 283 ff.)(1). VsNeoclassics/VsPiketty: However, this theory of distribution has some serious logical deficiencies and shortcomings that make it unsuitable as a theoretical explanation for the distribution of income and wealth (...) Marginal productivity/neoclassical: The neoclassical marginal productivity theory of distribution is used to explain both the micro and macro level. The microeconomic version of marginal productivity theory does not focus on income distribution, which is explained en passant, so to speak. Bofinger I 40 Factors of production/microeconomics: This is primarily about determining the demand for the individual factors of production on the respective factor markets. At the same time as the factor demand is determined, the individual factor prices (wages, interest on capital, basic rent) are also determined. The basic principle of factor price determination is identical for all factors of production. Using various assumptions - including in particular perfect competition and constant returns to scale - each factor of production in market equilibrium is remunerated according to the marginal product of the last unit still employed. In this model framework, the theory of price formation on a factor market is simultaneously a theory of income distribution. >Factors of production, >Factor market, >Production structure. Macroeconomics: The macroeconomic version of the marginal productivity theory of distribution transfers the laws obtained at the microeconomic level to the economy as a whole. The incomes of the factors of production also correspond to their respective factor prices at the macroeconomic level. If, as is generally the case, a Cobb-Douglas production function is assumed, the income produced is distributed completely among the factors of production involved. The macroeconomic wage rate (profit rate) is equated with the production elasticity of labor (capital). Variations in the wage rate or profit rate have no influence on the proportional distribution of income, as these trigger a corresponding compensating factor substitution. Elasticity: The income ratios change at most if the production elasticities are changed by non-neutral technical progress. >Elasticity. Bofinger I 41 Capital theory/VsPiketty: As has become clear in the context of the so-called capital theory controversy, however, the assumption of the existence of a macroeconomic production function and the specification of a defined “quantity of capital” independent of the prices of the various capital goods and thus of the profit rate prove to be untenable for certain logical reasons (cf. Harcourt 1972)(2)(3). >Capital/Piketty, >Capital/Harcourt. Method: The problem here is that the prices of the individual, heterogeneous capital goods must be known in advance in order to be able to add them up to an overall economic capital stock. However, the prices of the individual capital goods cannot be determined without knowledge of the interest rate on capital (the profit rate) (cf. Kurz/Salvadori 1995)(4). >Heinz D. Kurz, >Neri Salvadori. As Piero Sraffa demonstrated as early as 1960(5), the prices of capital goods and the rate of profit must be determined simultaneously (Sraffa 2014)(5). >Piero Sraffa. Outside of a one-sector model, it is therefore not possible to aggregate the various capital goods into a single variable “capital”. Samuelson: Paul Samuelson and other neoclassicists also conceded this at the end of the long-standing dispute between the critics of neoclassical production and capital theory from Cambridge (England) and its defenders from Cambridge (USA), which Piketty, however, completely misunderstands. >Paul Samuelson. Bofinger I 42 Capital theory: Although the Cambridge-Cambridge controversy has clearly shown that the macroeconomic version of marginal productivity theory is based on a circular argument that calls its theoretical foundation into question, it is still the central building block for neoclassical distribution analysis, on which Piketty also builds. Market power: Another point of criticism of the distribution theory used by Piketty is that the standard approach of the marginal productivity theory of distribution leaves no room for market power, social factors of influence or the consideration of other distributional conflicts that constantly occur in reality. 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. Piketty, T. 2014. Das Kapital im 21. Jahrhundert. München: Beck. 2. Harcourt, G. (1972): Some Cambridge Controversies in the Theory of Capital. Cambridge MA: Cambridge University Press. 3. Piketty (2014: 305 ff.) is mistaken when he argues that the Cambridge controversy was essentially about the question of the constancy of the capital coefficient. Unfortunately, he is clearly not familiar with this important topic. 4. Kurz, H. D./Salvadori, N. (1995): Theory of Production: a Long-Period Analysis. Cambridge MA: Cambridge University Press. 5. Sraffa, P. (2014 [1960]): Warenproduktion mittels Waren. Einleitung zu einer Kritik der ökonomischen Theorie. Marburg: Metropolis. Hagen Krämer. 2015. „Make no mistake, Thomas! Verteilungstheorie und Ungleichheitsdynamik bei Piketty“. In: Thomas Piketty und die Verteilungsfrage. Ed. Peter Bofinger, Gustav A. Horn, Kai D. Schmid und Till van Treeck. 2015. |
Piketty I Thomas Piketty Capital in the Twenty First Century Cambridge, MA 2014 Piketty II Thomas Piketty Capital and Ideology Cambridge, MA 2020 Piketty III Thomas Piketty The Economics of Inequality Cambridge, MA 2015 Bofinger II Peter Bofinger Monetary Policy: Goals, Institutions, Strategies, and Instruments Oxford 2001 |
| Income Inequality | Economic Theories | Góes I 23 Income inequality/Piketty hyopthesis/economic theories: MilanovicVsPiketty: Milanovic (2017, forthcoming) explains that the transmission mechanism between r > g and higher income inequality requires the following conditions: >Piketty model, >Piketty hypothesis, >Piketty formula, >Thomas Piketty. (a) the savings rate must be sufficiently high; (b) capital income must be more unequally distributed than labor income; and (c) a high correlation between the receipt of capital income and the position at the top of the income distribution. In a dynamic way, this paper shows that this mechanism falters because the negative responses of the saving rate to r - g shocks violate the first condition, thereby preventing a higher level of inequality compared to the levels observed before the increase in r - g. In fact, there is evidence that recent inequality trends are not related to the distribution of national income across the factors of production, but primarily to rising labor income inequality (see Francese and Mulas-Granados 2015)(2). In fact, there are many possible explanations for rising labor income inequality - such as: Dabla-Norris et al. (2015)(3) conclude from an analysis of cross-country data that past changes in inequality in advanced economies are mainly related to two changes in the labor market: higher skill premiums and lower union membership. Jaumotte and Buitron (2015) also present results linking changes in labour market institutions, in particular lower union density, to an increase in income inequality in advanced economies. Aghion et al. (2015)(4) suggest that innovation plays an important role. If innovators are rewarded with higher incomes due to a temporary technological advantage (in a Schumpeterian manner), inequality would be exacerbated. The authors show that innovation explains about one-fifth of the higher inequality observed in the US since 1975. Mare (2016)(5) and Greenwood et al. (2012)(6) argue that changes in mating behavior have contributed to the worsening of income inequality. The likelihood of someone marrying another person with a similar socioeconomic educational background (referred to as 'assortative mating') has increased in recent decades alongside the rise in income inequality in the US. The interaction between higher skill premiums and higher assortative mating exacerbates household income inequality as the gap between high and low earners widens and couples become more segregated. Chong and Gradstein (2007)(7) use a dynamic panel to show that inequality tends to decrease as institutional quality improves. The underlying logic is that if the basic rules for economic behavior are not enforced symmetrically, the rich have a greater chance of making economic gains, which increases inequality. Acemoglu and Robinson (2015)(1) make a similar argument. They say that economic institutions influence the distribution of skills in society and thus indirectly determine patterns of inequality. Piketty: A few years after the publication of Das Kapital, Piketty (2015)(8) himself acknowledged that the “rise in labor income inequality in recent decades clearly has little to do with r - g, and it is clearly a very important historical development.” Nevertheless, he 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 probably not the case. The results confirm the idea that recent inequality changes are not explained by r - g, but also that new shocks to r - g are unlikely to lead to higher inequality, as there is no evidence that shocks to r - g increase income inequality. Taken together, the observed endogenous dynamics of r - g and the share of the top 1% or the capital share cast doubt on the appropriateness of Piketty's prediction about inequality trends. *For the models in use siehe https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf 1. 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. 2. 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. 3. 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. 4. Aghion, Philippe et al. (2015). Innovation and Top Income Inequality. Working Paper 21247. National Bureau of Economic Research. doi: 10.3386/w21247. 5. 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. 6. 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. 7. 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. 8. 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 | 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 Formula | Fuest | Fuest I 3 Piketty Model/Fuest/Peichl/Waldenström: The so-called r - g model of Piketty (2014)(1), which relates the difference between the rate of return on capital, r, and the rate of income growth, g, to the level of economic inequality, (…) [i]n its simplest characterisation, (…) says that when existing (‘old’) capital grows faster than new capital is created out of accumulated incomes, then already relatively rich capital owners will become even richer relative to the others not holding capital, and thus inequality will increase. VsPiketty: From a theoretical perspective it is clear r > g is neither necessary nor sufficient for inequality to increase. It is not necessary because inequality may increase due to other reasons like, for instance, inequality of labour income, which has been a key driver of the recent surge in income inequality in the United States. It is not sufficient either, because capitalists may earn much, but save little. MankivVsPiketty: As (…) emphasised by Mankiw (2015)(2), r > g may not lead to increasing inequality because capital income taxes may reduce the net return to capital below g or because capital owners consume part of their income. If capital owners have enough children, wealth concentration will fall as they leave their wealth to the next generation.1 In addition, even if capital owners save a lot, their income cannot grow indefinitely. While the interest rate may indeed be permanently higher than the growth rate of GDP, it is obvious that capital income cannot permanently grow faster than GDP. The marginal productivity will also decline as the capital intensity of production increases.* Fuest I 6 Inequality/Fuest/Peichl/Waldenström: On the whole, the results (…) offer some tentative support for the r - g model as proposed by Piketty (2014)(1) and its proposed links between the r-g differential and wealth inequality. Fuest I 7 Problem: Given the considerable problems at hand related to measurement, data availability and statistical specification, much more effort is naturally needed before we can begin to speak about any stable relationships in these outcomes. Furthermore, the relationship between top wealth shares, financial sector development and economic growth reveals nothing about the direction of causality. For instance, it is perfectly possible that rising wealth concentration causes stronger growth in the financial sector. We therefore conclude that more research is needed to settle the issues at hand, >Capital tax/Piketty. * However, evidence suggests that the number of children decreases with income (Jones and Tertilt 2006)(3). The average number of children per family is below 2 for rich households. 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. Piketty, T. (2014), Capital in the 21st Century, Cambridge, MA: Belknap 2. Mankiw, Greg (2015). “Yes, r > g. So What?” In: American Economic Review: Papers & Proceedings 105.5, pp. 43–47. doi: 10.1257/aer.p20151059. 3. Jones, L.E. and M. Tertilt (2008). “An Economic History of Fertility in the United States: 1826–1960”, in: Rupert, P. (ed.), Frontiers of Family Economics, Bingley, West Yorkshire: Emerald Group Publishing Limited. Clemens Fuest, Andreas Peichl and Daniel Waldenström. Piketty’s r-g Model: Wealth Inequality and Tax Policy. https://www.ifo.de/DocDL/forum1-15-focus1.pdf |
Fuest I Clemens Fuest (ed.) George R. Zodrow Critical Issues in Taxation and Development (Cesifo Seminar Series) Cambridge, MA 2013 |
| Piketty Formula | Sinn | Piketty formula/SinnVsPiketty/Sinn(1): Piketty’s formula states that interest in the form of the average return on capital, r, is persistently higher than the growth rate of the economy, g. The consequence, according to Piketty, is that the wealth of an economy accumulates faster than the growth in economic output. Neoclassics: In fact, the formula has been known for quite a long time now; it denotes a fundamental implication of the neoclassical theory of economic growth. Indeed, over the long run, the rate of return to capital usually lies above the growth rate of the economy, as Piketty asserts. If that were not the case, land prices would be infinite, there would be excessive consumption, and growth would eventually end. >Neoclassical Economics. Interest rates/Piketty formula/Sinn: But the formula does not imply that wealth grows faster than economic output. Such a conclusion would only be warranted if the savings of an economy could be set equal to the economy’s capital income, so that the rate of economic growth is the same as the interest rate. But that is not the case. >Interest rates. Savings: Rather, savings are consistently smaller than the sum of all capital income. The wealthy consume substantial parts of their income, and the savings from labor income usually is small. Thus, the growth rate of wealth lies significantly below the interest rate; the fact that the interest rate exceeds the rate of economic growth in no way implies that wealth grows faster than the economy. >Saving, >Savings rate. Economic growth/growth theories: Indeed, a central finding of economic growth theory states that the interest rate of an economy, dependent on the savings rate, settles over the long term at a level in which the growth of capital equals the growth rate of output. The consequence is the longterm persistence of the ratio of wealth to economic output. The long-term constancy of the ratio is a basic ingredient of all growth theories. Behind the long-term persistence of this ratio stands a simple mathematical law. Savings/national income: If an economy saves a given portion of its income, the wealth resulting from the accumulation of those savings will increase in the long run at the same rate at which national income grows. >Growth, >Growth theory. Ratio of wealth to income: Thus, the ratio of wealth to income cannot increase permanently. The law is based on the fact that every increasing quantity can grow over the long run only at the rate at which its accretion grows. Example: An example is the heaping of earth into a mound. Assume that in every period, a further spade of earth is added, and that the size of the spade itself grows at a given rate from one period to the next. The growth rate of the amount of earth in the mound converges toward tire growth rate of the spade size. If we substitute the current savings of an economy for the amount of earth in the spade and wealth for the size of the mound, we obtain the long-run constancy of the ratio of wealth to income when a fixed share of income is saved. H.-W. Sinn per Piketty: It must be stressed that this law applies over the long run, over several decades. Wealth can well grow faster than the economy at given times. Piketty could then have a point. Distribution/SinnVsPiketty: But even when such is the case, there is hardly any reason for apprehension. When it comes to distributional issues, the important element is less the ratio of wealth to national income than the ratio of capital income to wage income, that is, the proportion of capital and wages in national income. The distributional shares of national income, as first observed by the left-leaning economist Joan Robinson in her 1942 book(2), An Essay on Marxian Economics, have remained fairly stable over time and follow no discernible trend. >Distribution theory. Wages/capital income: Much more important than Piketty’s theory of everything is the question of how many people share in the wage and capital income. If the number of wage earners increases faster than the number of wealth owners, a less desirable distributional pattern could emerge despite the constancy of the ratio of capital to wage income. That could be the case in the United States, with its large number of immigrants, and could be the reason for the current dissatisfaction among the populace. But there is no evidence to support this as a general law. >Piketty’s Laws, >Wages, >Income. Solution/Sinn: And if the risk should indeed exist that the number of people sharing the capital income grows too slowly compared with the number of people sharing the labor income, the best medicine is to improve the chances of upward mobility. The more people share the wealth and capital income, the smaller the distributional problem. It helps for this reason if the rich have more children than the poor, since their wealth will eventually become spread among their heirs, solving the distributional problem at a stroke. Policy measures: A family income splitting system such as France’s is one of the policy measures that a society might consider if it fears an undesirable concentration of wealth. Regardless, a progressive taxation system is needed to check the growth in net income among the upper income echelons. Inequality: Even in the absence of a fundamental trend toward greater inequality owing to the theory formulated by Piketty, inequality within the wealthy group can increase because some dynasties accumulate ever more wealth at the expense of other dynasties. Taxation: Whether action is needed in this regard in Europe is open to debate, since progressive taxation is already present it will be hard to make the case for even more of it. My conclusion is that Piketty, like Marx, caters to a longing, simmering among the people, but that he tries to underpin his policy proposals with a theory that does not substantiate what he asserts.(1) >Taxation. 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. Hans-Werner Sinn. 2017. Piketty’s World Formula. https://www.hanswernersinn.de/en/AP_22062017 (30.01.2025) 2. Joan Robinson. 1942. An Essay on Marxian Economics. London. Macmillan. |
Sinn I Hans-Werner Sinn The Green Paradox: A Supply-Side Approach to Global Warming (Mit Press) Cambridge, MA 2012 |
| 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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| Saving | Piketty | Bofinger I 138 Saving/Piketty/Schmidt: “Saving” is one of the most ambiguous terms in economics, which can have very different meanings depending on the context: Bofinger I 139 - Net wealth creation: If “saving” means the creation of net wealth, then at the level of private households or the state this is the difference between income in a period and consumption in the same period. For companies it is simply the undistributed profits, i.e. the part of the difference between income and expenditure in the same period that is not distributed to the owners. - Financial asset formation: If 'saving' is used in the sense of financial asset formation, it refers to the difference between income and expenditure in the same period. If an economic entity has spent less than it has earned, its financial assets have increased - but not necessarily its net worth, because financial assets can also have increased due to the sale of tangible assets. - Consumption restriction: 'Saving' in the sense of consumption restriction means that an economic entity reduces its consumption expenditure compared to consumption expenditure in the previous period. This meaning is only relevant for private households and the state, since companies do not consume by definition.(1) - Long-term investment: 'Saving' is often not understood as wealth creation, but as a reallocation of assets, particularly within the portfolio of financial assets. Saving in this sense occurs when existing funds (cash or amounts in a savings account or call money account) are invested over the longer term, for example by purchasing longer-term bonds or shares or in tangible assets. In this case, the portfolio of assets does not change, only the composition of the assets - namely towards a less liquid form of investment, which, however, generally enables a higher return. >Saving. Bofinger I 140 Piketty: The data cited by Piketty (Piketty 2014: 229 ff.)(2) refer to the net wealth creation (primarily in the private sector). The net wealth creation of each sector can be made up of the creation of tangible assets (= net investments) and the creation of monetary assets. As long as the changes in the monetary assets of domestic actors do not cancel each other out, a country as a whole can increase its monetary assets through current account surpluses or reduce its monetary assets through current account deficits. The values cited by Piketty therefore indicate the realized net wealth creation of the countries as a percentage of the (net) national income (NNI). Bofinger I 149 Saving/return/growth/VsPiketty: In his considerations, Piketty has to assume a low growth rate (which he attributes to low population growth and a low, unexplained increase in productivity) and, on the other hand, a substitution elasticity between capital and labor of greater than one in order to explain the greater importance and power of capital. What he overlooks is that an increase in planned savings can lead to a decline in returns and growth - for him, these variables seem to be largely independent of each other. 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. When it comes to the state, the term "state consumption" is also unfortunate, as it actually refers to the state services that the state provides to its citizens. This is usually free of charge, as the state services are not sold on the market but are financed indirectly through taxes. 2. Piketty, T. 2014. Das Kapital im 21. Jahrhundert. München: Beck. Johannes Schmidt. 2015. „Kapital und Sparen bei Piketty: Einige saldenmechanische Anmerkungen“. In: Thomas Piketty und die Verteilungsfrage. Ed. Peter Bofinger, Gustav A. Horn, Kai D. Schmid und Till van Treeck. 2015. |
Piketty I Thomas Piketty Capital in the Twenty First Century Cambridge, MA 2014 Piketty II Thomas Piketty Capital and Ideology Cambridge, MA 2020 Piketty III Thomas Piketty The Economics of Inequality Cambridge, MA 2015 Bofinger II Peter Bofinger Monetary Policy: Goals, Institutions, Strategies, and Instruments Oxford 2001 |
| 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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| Share Prices | Piketty | Bofinger I 146/47 Share prices/quantity effects/price effects/Piketty/Schmidt: “It is true that share prices tend to rise faster in the long term than consumer prices, but this is mainly because the reinvested profits allow the companies concerned to increase their size and capital (therefore it is a quantity effect and not a price effect). If the reinvested profits are added to private savings, this effect largely disappears.”(1) Asset creationVsPiketty: Here Piketty now seems to equate the efforts of private households and companies to build up financial assets with genuine overall net asset creation, which is only possible in the form of real asset creation (if current account balances are not taken into account). But that would be a fallacy. >Saving/economic theories, >Saving/Piketty, >Quantity effects, >Price effects. 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. Piketty, T. 2014. Das Kapital im 21. Jahrhundert. München: Beck. S.233 Johannes Schmidt. 2015. „Kapital und Sparen bei Piketty: Einige saldenmechanische Anmerkungen“. In: Thomas Piketty und die Verteilungsfrage. Ed. Peter Bofinger, Gustav A. Horn, Kai D. Schmid und Till van Treeck. 2015. |
Piketty I Thomas Piketty Capital in the Twenty First Century Cambridge, MA 2014 Piketty II Thomas Piketty Capital and Ideology Cambridge, MA 2020 Piketty III Thomas Piketty The Economics of Inequality Cambridge, MA 2015 Bofinger II Peter Bofinger Monetary Policy: Goals, Institutions, Strategies, and Instruments Oxford 2001 |
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