On Piketty

Karl Smith at Niskanen writes:

"The economic growth literature suggests that in a free market economy, r roughly equals g. It was this fact that made me doubt Thomas Piketty’s thesis even before his book was published. In everything he said and wrote, r > g played a major role. Yet r > g is not sustainable. If it was, then you could obtain infinite growth in finite time simply by investing the interest payments from r in private sector capital.

"Not coincidently, you can understand this as the inverse of the thesis outlined by Piketty. Suppose r > g lasted in a normal—that is, non-infinite—economy. This would cause a long term divergence between financial claims on the economy (wealth) and economic productivity of the economy (income).

"Since that can’t go on forever, it stops. That inability for asset prices to grow unmoored to underlying productivity is the fundamental driver of corrections in asset markets. … In short, the underlying assumption that the economy will grow faster than the interest rate on public debt is well-grounded, both theoretically and empirically. By contrast, the assumptions in Trumps budget are grossly outside the mainstream, completely untenable and deserve all of the criticism they are receiving."

And Matt Bruenig, at Jacobin:

“The problem with Piketty’s story, which Naidu and his peers get at in various ways, is that it doesn’t match reality. Assets like real estate, equity, and debt are not assessed according to the quantity of savings that go into creating them. They are assessed according to the expectations of how much income those assets will deliver to their owners in the future. Put simply: asset values are forward-looking, not backward-looking. …  Ownership of something like a company share does not entail ownership of capital goods in any real sense. It amounts to owning a bundle of legal rights to future flows of income. ...

“Piketty may well have everything backwards. If capital increases its ability to extract income from the economy, that would boost the future flow of income that goes to owners of existing assets, and thereby increase the capital share. When a greater portion of the national income is being funneled to owners of assets, the market value of those assets will go up, causing measured wealth to go up as well."