Tuesday, June 3, 2014

Scott Sumner as He Starts to Read Piketty: Even More Absurd Than I Expected

This Year's Model
By Scott Sumner

I’ve started Piketty’s new book, but just finished the first chapter (intro.)  Here are a few initial observations:

1.  He has a fairly left-wing worldview (albeit certainly not Marxist.)

2.  He says that “all the historical data” shows that real wages in Britain did poorly in the first 1/2 to 2/3rds of the 19th century.  I’m no expert here, but that’s not what I was taught.  I was taught (at both Wisconsin and Chicago) that the data conflicted. Some data showed what Piketty claims, and some data suggested that real wages rose, that British workers did better than peasants, and also better than people on the continent.  Does anyone know whether all the data supports Piketty’s claim?

3.  He is rather dismissive of those he disagrees with.  At Econlog I extensively discuss his mischaracterization of Simon Kuznets’ views.  That’s the post to read if you are a visitor from MR and only have time for one.

4.  He says the wealth/income ratio in the late 19th century was 600%, “which is a lot.”  That doesn’t seem like a lot to me.  It will be interesting to see if he later explains why it is a lot.

5. I’m not quite sure what motivated him to write the book.  Is it a study of capital, of wealth, or of economic inequality?  The title suggests capital, the intro suggests he’s more interested in wealth and income inequality.
6.  He says that two key graphs motivate his study.  One shows the U-shaped pattern in income inequality over time, and the other shows a U-shaped pattern in the ratio of private “capital” and income. The second graph has been challenged by Chris Giles.  Then he gets to the model.

If, moreover, the rate of return on capital remains significantly above the growth rate for an extended period of time (which is more likely when the growth rate is low, though not automatic), then the risk of divergence in the distribution of wealth is very high.

This fundamental inequality, which I will write as r > g  (where rstands for the average annual rate of return on capital, including profits, dividends, interest, rents, and other income from capital, expressed as a percentage of its total value, and g stands for the rate of growth of the economy, that is the annual increase in income or output), will play a crucial role in this book. In a sense, it sums up the overall logic of my conclusions.

I had read numerous reviews of the book, pro and con, before I started reading it, so I was well aware of the importance Piketty placed on the r > g relationship. When I first heard about this model it struck me as absurd. I started reading the book, thinking Piketty would provide some sort of persuasive explanation for the model. After all, the book is been very well reviewed, for the most part. And yet right after these two paragraphs, here’s what I found:


  1. "1. He has a fairly left-wing worldview (albeit certainly not Marxist.)"

    So he's just "merely" stupid and not a crazed Communist. If so then he's just as dangerous.

    "3. He is rather dismissive of those he disagrees with."

    Stupid AND arrogant, eh? Worse than I thought.

    1. Chicago Skyscraper Needs Special Servicing

      The former Sears Tower, now known as the Willis Tower, requested loan modifications from its creditors before entering "imminent monetary default." I take it this is code for bankruptcy, not having the cash to make principal and interest payments. Willis Tower's owners flip commercial real estate for profit and include Middle East sovereign wealth funds as investors. Owners include Joe Chetrit and Joseph Moinian. Crain's NY Business had this to say about the first Joe:

      "Never bet against Joe Chetrit," said Robert Rosania, an executive at Stellar Management, which co-developed five residential rental towers called Columbus Square with Mr. Chetrit and sold off the complex last year for $630 million. "There are very few [real estate] investors in the city of New York who have made as much money as he has in the last decade."

      Crain's Chicago Business gave details on Willis Tower's debts:

      The senior CMBS loan, which matures in 2017, has nearly $499 million remaining. Including other loans not rated by Fitch, Willis Tower's owners have more than $774 million in total CMBS debt on the tower, according to Fitch.

      How much of any packaged debt, rated or unrated, on Willis Tower went to owners and investors via special fees or distributions?


      yup...the almighty capitalists take it to the bank when their failing again....how equitable.

  2. Bob, I can't figure why you linked to this guy.

    His comments on Seattle's new $15/hr minimum wage show how ignorant he is.

    He says that the government should be the one paying the higher salary to help small biz. Seriously- he thinks "the government" has the power to overrule the market and doesn't even mention that the money "the government" uses to support this $15/hr bullshit is STOLEN FROM TAXPAYERS!

    Sorry, this guy is a loon.

    1. Makes me wonder about the sanity of some people.

    2. Why Don’t the Unemployed Get Off Their Couches?
      And Eight Other Critical Questions for Americans The 3.5 million long-term jobless are still here though, crashing on the couches of family members or friends, struggling to feed their kids, unable to afford gas to get to those job interviews that are seldom to be found anyway. Today, former State Department whistleblower Peter Van Buren, who has been following the fate of the 99% for TomDispatch and whose new book on the subject, Ghosts of Tom Joad, has just been published, takes a look at why it's so hard for the long-term unemployed to get back to work. He also answers questions about why the American economy doesn't work for those at the bottom, no less the sinking middle class.

      As the United States slips from its status as the globe's number one economic power, small numbers of Americans continue to amass staggering amounts of wealth, while simultaneously inequality trends toward historic levels. At what appears to be a critical juncture in our history and the history of inequality in this country, here are nine questions we need to ask about who we are and what will become of us. Let's start with a French economist who has emerged as an important voice on what’s happening in America today.

      1) What does Thomas Piketty have to do with the 99%?

      Just in case you aren’t yet rock-bottom certain about the reality of that divide, here are some stats: the top 1% of Americans hold 35% of the nation's net worth; the bottom 80%, only 11% percent. The United States has such an unequal distribution of wealth that, in global rankings, it falls among the planet’s kleptocracies, not the developed nations that were once its peers. The mathematical measure of wealth-inequality is called "Gini," and the higher it is, the more extreme a nation's wealth-inequality. The Gini for the U.S. is 85; for Germany, 77; Canada, 72; and Bangladesh, 64. Nations more unequal than the U.S. include Kazakhstan at 86 and the Ukraine at 90. The African continent tips in at just under 85. Odd company for the self-proclaimed “indispensable nation.”