French economist Thomas Piketty is raising a ruckus

[Budget_Player_Cadet]

@Sam_Stone

I think it might be you who needs to brush up on his Econ 101. Even according to Keynes, fiscal stimulus only works when there is an artificial demand gap, such as fear causing excess savings.

When did I imply otherwise? That’s certainly the case right now. You say a lot of things here that I agree with - I’m pretty sure I never implied that fiscal stimulus is always a good thing.

[Nava]

@BrainGlutton

No, but the air here appears saturated with the notion that we all should be.

And with the notion that the only place where you can have it is in the US (from a single poster, but he’s posting a lot).

[adaher]

Not the only place, but the best place. You know, a place where you’re not rich because you make $80,000/yr.

[Shalmanese]

I’m making my way through the book right now and I want to address some points made in this thread:

• What Piketty talks about is not “obvious”, it’s rightly being hailed as groundbreaking work and, whether you agree with him or not, the stuff he talks about is going to change the economic debate for the next 50 years.
• His main thesis is that the period starting from 1914 with the triple whammy of WWI, the great depression and WWII up until 1980 or so lead to a highly anomalous period in economic history. Most of modern economic theory was developed during this time and assumed the period they were living in was normal.
• What Piketty does is look over a broader span of history and show that economic thought was very different pre-20th century.
• At it’s core, what Piketty addresses is modern economic theory’s prime focus on income. You can see in this very thread, the entire debate has centered around income because that’s the economic debate that we’re used to having. Instead, Piketty argues that outside of the span of 1914 - 1980, wealth plays a much more important role in understanding economics than income.
• What Piketty shows is that, prior to the 20th century, the received economic wisdom was that economic status came from inherited wealth, not earned income. Either you were born rich, in which case you lived off the dividends of your inheritance and did not work, or you were born poor and you earned an income to scrape by.
• Piketty claims that unchecked capitalism will inevitably return us to this state of the world and that we are already on a path where wealth is more important than income (Currently, about 30% of all earnings per year is inherited wealth).
• This is beyond a left-right issue, neither side of the political spectrum has a philosophy that can coherently handle a world in which an accident of birth almost solely determines your economic prospects in life.
• The reason why this work is so groundbreaking is because it upends many of the foundational premises of political and economic thought; that Victorian economic systems were obsolete, that capitalism and democracy are fundamentally compatible, that a meritocracy is always going to be available.
• Piketty’s proposed solution, a global wealth tax, is, IMHO, ludicrous and unworkable.
• If Piketty is to be believed, then it leads to an incredibly depressing prediction: We are the last generation that will have malleable economic prospects. If you managed to accumulate $5M+, then your children will join the dilettante elite and live a life of indolence. If you do not, then you have doomed your offspring to peasanthood unto the 10th generation.

There’s an incredible amount there to argue and debate with which is why I find it so disheartening that this thread has devolved into the same tired economic debates rehashed.

[marshmallow]

@Shalmanese

• What Piketty talks about is not “obvious”

We should give him serious props if he can inject some dissident thought into mainstream economics using good old facts and figures, but his stuff looks like the standard leftist capitalist critique. Complaints about wage slavery and the economic masters accruing power so as to maintain their privilege are older than the steam engine.

Modern libs say it can be fixed by a couple simple government policies and boom, the middle class is alive and kickin’ again. Whereas Piketty seems to come on a more dissident line of “lol we’re fucked.” If his work isn’t shunted off into the memory hole of history it might as well be rolled into a new generation of propaganda. See guys, all these rights and expectations you had were just historical accidents and aren’t sustainable. Stop being so entitled.

• The reason why this work is so groundbreaking is because it upends many of the foundational premises of political and economic thought; that Victorian economic systems were obsolete, that capitalism and democracy are fundamentally compatible, that a meritocracy is always going to be available.

I guess, but traditional political and economic thought is pretty disconnected from reality. There are plenty of circles where words like “meritocracy” and “democracy” are punchlines.

[BrainGlutton]

@marshmallow

I guess, but traditional political and economic thought is pretty disconnected from reality.

Compared to what?

[BrainGlutton]

From Paul Krugman’s review of Piketty’s book:

The general presumption of most inequality researchers has been that earned income, usually salaries, is where all the action is, and that income from capital is neither important nor interesting. Piketty shows, however, that even today income from capital, not earnings, predominates at the top of the income distribution. He also shows that in the past—during Europe’s Belle Époque and, to a lesser extent, America’s Gilded Age—unequal ownership of assets, not unequal pay, was the prime driver of income disparities. And he argues that we’re on our way back to that kind of society. Nor is this casual speculation on his part. For all that Capital in the Twenty-First Century is a work of principled empiricism, it is very much driven by a theoretical frame that attempts to unify discussion of economic growth and the distribution of both income and wealth. Basically, Piketty sees economic history as the story of a race between capital accumulation and other factors driving growth, mainly population growth and technological progress.

[XT]

[QUOTE=Shalmanese]
Piketty claims that unchecked capitalism will inevitably return us to this state of the world and that we are already on a path where wealth is more important than income (Currently, about 30% of all earnings per year is inherited wealth).
[/QUOTE]

I haven’t read the book, and based on the thread I doubt I will. This point however I wanted to touch on. First of all, he’s batting at a hypothetical. There is no unchecked capitalism either in the US nor in the rest of the world…nor, as far as I know, has there ever been. Certainly we aren’t headed towards nor at the peak of unchecked capitalism…quite the opposite, since there are many, many checks on it, again both in the US and elsewhere.

As to his larger point, does he back this up with some trending data? He claims it’s 30% today (based on?)…what was it 10 years ago? 20? 50? Is he factoring in the recent pretty sever global recession in his trending data? Because that (30%) seems reasonable to me, and I’d be surprised if it was vastly different in the immediate past (on the time scale you seem to indicate he’s looking at)…in fact, my guess is since he’s talking about per-industrialization eras, that in the past it was much higher. I realize that’s his point (i.e. that we are headed back to the same trend), but how does he back up that statement with actual facts?

[BrainGlutton]

@XT

I haven’t read the book, and based on the thread I doubt I will. This point however I wanted to touch on. First of all, he’s batting at a hypothetical. There is no unchecked capitalism either in the US nor in the rest of the world…nor, as far as I know, has there ever been. Certainly we aren’t headed towards nor at the peak of unchecked capitalism…quite the opposite, since there are many, many checks on it, again both in the US and elsewhere.

That’s a continuum, not a dichotomy. We see less wealth-inequality in some countries with more checks on capitalism, such as the Scandinavian countries, and such as America in the 1940s-60s.

@XT

As to his larger point, does he back this up with some trending data?

Presumably; every reviewer seems to agree that Piketty’s statistical research is impressive.

[XT]

[QUOTE=BrainGlutton]
Presumably; every reviewer seems to agree that Piketty’s statistical research is impressive.
[/QUOTE]

:dubious: EVERY reviewer agrees with his statistical research? I find that difficult to believe. But you’ve read the book…what’s the trend? Is it going up 1% per year? 1% per decade? 1% per century? 1% per minute?

That’s a continuum, not a dichotomy. We see less wealth-inequality in some countries with more checks on capitalism, such as the Scandinavian countries, and such as America in the 1940s-60s.

Yeah, but see I don’t think that wealth-inequality is necessarily a bad thing or an issue, so I don’t actually care that much. The point was that there isn’t any unchecked capitalism, and really there never was, but certainly the trend isn’t headed towards that in any case, so he’s batting at a strawman. At least if his point in the book is being accurately translated into this thread.

[BrainGlutton]

@XT

:dubious: EVERY reviewer agrees with his statistical research? I find that difficult to believe.

No, every reviewer agrees the book includes a lot of statistical research, not necessarily with his conclusions; and I’ve seen no contradictions on matters of fact. From Krugman’s review:

What do we know about economic inequality, and about when do we know it? Until the Piketty revolution swept through the field, most of what we knew about income and wealth inequality came from surveys, in which randomly chosen households are asked to fill in a questionnaire, and their answers are tallied up to produce a statistical portrait of the whole. The international gold standard for such surveys is the annual survey conducted once a year by the Census Bureau. The Federal Reserve also conducts a triennial survey of the distribution of wealth.

These two surveys are an essential guide to the changing shape of American society. Among other things, they have long pointed to a dramatic shift in the process of US economic growth, one that started around 1980. Before then, families at all levels saw their incomes grow more or less in tandem with the growth of the economy as a whole. After 1980, however, the lion’s share of gains went to the top end of the income distribution, with families in the bottom half lagging far behind.

Historically, other countries haven’t been equally good at keeping track of who gets what; but this situation has improved over time, in large part thanks to the efforts of the Luxembourg Income Study (with which I will soon be affiliated). And the growing availability of survey data that can be compared across nations has led to further important insights. In particular, we now know both that the United States has a much more unequal distribution of income than other advanced countries and that much of this difference in outcomes can be attributed directly to government action. European nations in general have highly unequal incomes from market activity, just like the United States, although possibly not to the same extent. But they do far more redistribution through taxes and transfers than America does, leading to much less inequality in disposable incomes.

Yet for all their usefulness, survey data have important limitations. They tend to undercount or miss entirely the income that accrues to the handful of individuals at the very top of the income scale. They also have limited historical depth. Even US survey data only take us to 1947.

Enter Piketty and his colleagues, who have turned to an entirely different source of information: tax records. This isn’t a new idea. Indeed, early analyses of income distribution relied on tax data because they had little else to go on. Piketty et al. have, however, found ways to merge tax data with other sources to produce information that crucially complements survey evidence. In particular, tax data tell us a great deal about the elite. And tax-based estimates can reach much further into the past: the United States has had an income tax since 1913, Britain since 1909. France, thanks to elaborate estate tax collection and record-keeping, has wealth data reaching back to the late eighteenth century.

Exploiting these data isn’t simple. But by using all the tricks of the trade, plus some educated guesswork, Piketty is able to produce a summary of the fall and rise of extreme inequality over the course of the past century. It looks like Table 1 on this page.

@XT

But you’ve read the book…

I haven’t; said so in the OP. My library-request is 29th in line . . . not sure I’ll even read it when I have it, it’s said to be a 700-page doorstopper, but at least I can skim it.

[XT]

@BrainGlutton

I haven’t; said so in the OP. My library-request is 29th in line . . . not sure I’ll even read it when I have it, it’s said to be a 700-page doorstopper, but at least I can skim it.

Oh, sorry, thought you had read it. My apologies.

[Batistuta]

nm

[XT]

Just hard to believe that every group of ANY reviewers would ever agree on anything I guess.

[BrainGlutton]

@XT

Just hard to believe that every group of ANY reviewers would ever agree on anything I guess.

[shrug] If they’ve actually read the book, they can at least agree on what it says.

[Sam_Stone]

@Budget_Player_Cadet

When did I imply otherwise? That’s certainly the case right now. You say a lot of things here that I agree with - I’m pretty sure I never implied that fiscal stimulus is always a good thing.

Well, I was commenting on your reply to this exchange:

@ITR Champion

How does collecting a dollar in taxes and then spending it “stimulate the economy” any more than just leaving the taxpayer with his or her dollar?

@BrainGlutton

Og, it’s like Keynes never existed!

BrainGlutton’s response, invoking Keynes as a general answer to a question about taxing and spending, is simply wrong. ITR Champion questioned this, to which you responded,

@Budget Player Cadet

With all due respect, what he’s describing isn’t just econ 101, it’s been econ 101 for almost a century. If you really don’t understand the concept at this level, then you shouldn’t be entering a discussion on economics.

That’s the exchange I was responding to. To the extent that fiscal stimulus may work, it’s only in the context of an economic shock that causes a temporary reduction in demand not warranted by economic fundamentals. In addition, fiscal stimulus has nothing to do with taxing and spending, which is not fiscal stimulus at all. Borrowing and spending is, but if you’re taxing the money out of one part of the economy and spending it on another, there is no net ‘fiscal stimulus’ (or perhaps a small stimulus by increasing the velocity of money). ‘Fiscal stimulus’ usually refers to the practice of borrowing money to be spent.

In that sense, it’s Brainglutton who failed econ 101, but you backed him up. But to be fair, I can see how the context (or lack thereof) may have been lost in the exchange, so let’s just let that part of it go.

I do take exception to your claim that the efficacy of fiscal stimulus is ‘econ 101’, if by that you mean a basic principle of economics that is widely accepted. There is significant controversy over the efficacy of fiscal stimulus, and if anything the results of fiscal stimulus after the recession of 2008 make it even more controversial. And almost no economists believe that it always works, even during recessions. Much depends on the country’s current debt load, the reasons for the recession, and other factors.

For example, here’s a quote from Robert Mundell’s citation for his 1999 Nobel Prize:

Mundell introduced foreign trade and capital movements into the so-called IS-LM model of a closed economy, initially developed by the 1972 economics laureate Sir John Hicks. This allowed him to show that the effects of stabilization policy hinge on the degree of international capital mobility. In particular, he demonstrated the far-reaching importance of the exchange rate regime: under a floating exchange rate, monetary policy becomes powerful and fiscal policy powerless, whereas the opposite is true under a fixed exchange rate.

Bolding mine. And in fact, the few studies of the effects of fiscal stimulus I’ve seen which measured actual results (as opposed to merely using Keynesian models) showed that they were much less effective than predicted, and especially so in countries with open economies and floating exchange rates.

For example, see this How Big (Small?) are Fiscal Multipliers?:

We contribute to the debate on the macroeconomic effects of fiscal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) **the fiscal multiplier is relatively large in economies operating under predetermined exchange rates but is zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are smaller than in closed economies; (iv) fiscal multipliers in high-debt countries are negative. **

Again, bolding mine. Other studies looking at the actual empirical data (such as this one) did not find the positive effects claimed for the U.S. stimulus. And as mentioned, Japan has been using fiscal stimulus extensively to little apparent effect other than to increase their debt.

An appeal to ‘econ 101’ is a way to shut down debate by claiming that a principle is both simple and beyond dispute. Neither is true in the case of fiscal stimulus. It also means that your comment that [regarding the efficacy of fiscal stimulus] ‘it’s certainly the case now’, is not true. The recession is over, the economy is growing (slowly), U.S. debt is higher than it was in 1999, and there’s no evidence whatsoever that another fiscal stimulus would be a good idea - if it ever was.

[Sam_Stone]

Getting back to Piketty, I haven’t read the book, but I’ve read a number of reviews from across the political spectrum. As you’d guess, the enthusiasm for the book is much greater on the left than it is on the right. Some of the specific criticisms that seem at least partially valid are:

1. Piketty’s models don’t factor risk into the capital equation.

2. Piketty himself notes substantial uncertainties when discussing the data itself, but then drops the caveats when making some rather strong statements in conclusion.

3. Piketty treats capital and income as monolithic things, but not all capital is the same, and not all labor is the same.

4.The long-term predictions are based on an ‘if this goes on…’ extrapolation of current trends. That usually gets forecasters in trouble. If we’re in a transition period where the nature of work and investment is changing due to automation as many on the left claim, there’s no reason to believe that these relationships will hold into the future. What happens if 3D printing, virtual factories, and other modern inventions dramatically lower capital requirements for new business? The return on capital goes even higher perhaps, but the nature of capital changes in ways that may make it more of a middle-class phenomenon. Any work that extrapolates a complex economy far into the future is very suspect.

5. People reading the work are interpreting it as, “The rich get richer while the poor get poorer”, while in fact it says "The rich get richer faster than the income classes, but everyone gets richer.’

6. There seems to be an assumption among readers that the rich have the capital and the working classes only have income. But in fact, a large amount of the capital stock takes the form of retirement funds and savings of the working class. More so in some countries than others.

There are other criticisms as well. But even the critics are acknowledging that it’s an impressive book.

[Budget_Player_Cadet]

Yeah, I screwed up. Thanks for correcting me Sam. Although taxing and spending can lead to a sort of quasi-stimulus effect when you take from those who are just sitting on their money (at the moment, banks and those at the upper end of the economic scale). Obviously, this is a very conditional and limited effect.

[Sam_Stone]

Yeah, agreed. I did note the same thing when I said it might have a mild effect due to increasing the velocity of money (taking money people are sitting on and giving it to people who will spend it).

In any event, it’s not a big deal.

[BrainGlutton]

I’m reminded of this old Cold War propaganda toon from the '40s or '50s. The one who posted it says “Cartoon predicts the future 50 years ago. This is amazing insight!” And he’s mostly right in a way he will never understand. Everything the Farmer, the Worker and the Statesman envision being done to them by the Ismist State now has been done to them – by the Capitalist!