Tuesday, March 25, 2014

Capital in partial equilibrium

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Review: Thomas Piketty, Capital in the Twenty-First Century

Piketty's primary contribution is to provide an impressive array of data on wealth and income, for several countries, beginning as early as the 1700s in some cases. Note that he does not examine consumption data. The book is an impressive feat and certainly deserves attention, as the facts Piketty provides are crucial to discussions of the evolution of capital and economic inequality in the rich countries. Many reviews have been very positive; there are a lot of positive things I could say about it, but I will leave that to others. The book suffers from some fundamental flaws; in short, while it is heavy on data it is light on serious economics. Readers will find themselves wading through hundreds of pages of opinion and ideological quips, not economic analysis, with interesting charts scattered throughout. The firehose of data can be overwhelming, which may explain why some reviewers internalized his arguments uncritically. Piketty's accomplishments with data collection are admirable. But a book of this size, with the title Capital, should include some economics.

Piketty's data on inheritance are the most interesting and persuasive to me. Inheritance still matters and plays a nontrivial role in the wealth and income distribution. Reducing wealth inequality over time, should we decide to do so, will require serious attention to the issue of inheritance, which more than any other issue lacks a tie to meritocracy (but that does not mean incentives stop mattering!). There may be other arguments, not based solely on inequality, for thinking about inheritance. That said, not all capital is created equal, and the book could have benefited from some focus on distinctions between capital types--particularly in the context of inheritance.

Most of the analysis in the book is more about accounting than economics. Piketty takes nearly everything as exogenous then divides things arithmetically. His ubiquitous r > g heuristic takes both sides of the inequality as given for almost the entire book. Lines like "the richest 10 percent appropriate three-quarters of the growth" (297) enable lazy readers to avoid thinking about what actually determines income. Language about "appropriation" suggests that we live in an endowment economy, as does the claim that post-World War I wealth inequality fell "so low that nearly half the population were able to acquire some measure of wealth" (350). Endogeneity, anyone? Taking income as exogenous leads to other large problems with inference, such as the claim that "meritocratic extremism can thus lead to a race between supermanagers and rentiers, to the detriment of those who are neither" (417). Piketty does not consider the possibility that this race results in more income than otherwise, nor does he consider the notion that an increase in the bargaining power of elite executives could actually come at the expense of capital owners rather than workers. I'm not making an argument for either here; I'm simply suggesting that Piketty's ideological quips don't deserve the certainty with which he delivers them. Models with endowment economies have their purposes, but a 600-page book should be able to relax such strict assumptions. His criticisms of mathematical economics (32, 574) are not surprising given that he relies so heavily on assumptions and mechanisms that would be highly vulnerable to criticism if they were forced into the transparency of a formal model.

This kind of fast-and-loose economic reasoning pervades the book. Piketty attributes the rise of the "patrimonial middle class"--the great home-owning middle class of developed countries--entirely to the rise of capital taxation (373). It's perfectly reasonable to argue that taxation played a role, but it's absurd to give taxation all the credit without further analysis. Piketty relies on this shaky causal claim for his central thesis; presumably unbounded capital accumulation wouldn't be a problem if everyone owned some. Denying that economic forces played any role in bringing wealth to the middle class helps Piketty claim that inequality will spiral out of control and leave us all in poverty unless serious tax reform is effected. This argument also requires him to assure readers that there are no tradeoffs associated with capital taxation: "It is important to note that the effect of the tax on capital income is not to reduce the total accumulation of wealth" (373). We also learn that there is "no doubt that the increase of inequality in the United States contributed to the nation's financial instability" (297). No identification problem here, folks; causal inference is easy! The book is littered with extremely strong claims like these, despite the existence of good reasons to at least be skeptical of some of them. Maybe Piketty is right about these things, but he has not shown it here; and even if his considerable collection of charts and tables is enough to dazzle most reviewers into fawning submission, the data are not sufficient for demonstrating his strong conclusions.

Piketty's data on the rise of middle-class capital ownership raise an important point. A key theme of the book is that poor people don't own productive assets, so they must rely entirely on labor for income. But is taxation and redistribution the only way to address this situation? This poses a difficult question for those who oppose some form of privatization of government retirement programs. One cannot simultaneously claim that owners of capital stand to gain absurd riches in coming decades and that privatization and choice for Social Security is a terrible idea.* This is not the only possible alternative to taxation, but it is a reminder that one way to treat the problem of poor people not owning stuff may be to help poor people, well, own more stuff. But Piketty simply asserts that "only a progressive tax on capital can effectively impede" increasing wealth concentration (439). More generally, Piketty decries the ability of those with large fortunes to access opportunities for higher rates of capital return than those with smaller starting funds, but he makes no mention of the fact that this is due in part to laws banning small investors from participating in alternative investments. By law, if I want to invest in a startup, I can only do it in undiversified ways (like starting my own firm or investing in a friend's). We don't need higher taxes to help lower classes invest better.

Another key weakness of the book is that, like much of the popular debate on inequality, it focuses almost entirely on higher moments of income and wealth distributions while making only minimal effort to provide context about absolute levels of income and wealth. Piketty compares inequality over the centuries, noting that it is returning to pre-World War I levels then claiming that "the poorer half of the population are as poor today as they were in the past" (261). This is only meaningful in relative terms; as Piketty briefly mentions a few times (but does not emphasize), the poor of 2014 are much better off than even average earners from previous centuries: "With 5-10 times the average income in 1800, one would have been in a situation somewhere between the minimum and average wage today" (415, see also 88), and even Piketty admits that this claim relies on dubious adjustments for inflation (how much did a car with air conditioning cost in 1800?). The truth is that most of today's developed-country poor are astronomically, unquantifiably better off than almost anyone from 1800, which raises the question of why Piketty sounds alarms about inequality reaching previous levels. He briefly acknowledges modern international context in chapter 12, but he examines only wealth inequality,** which is tricky, and makes no mention of global income inequality, which has been declining. In any case, Piketty has strong incentives to tell us that the only thing that matters is inequality within rich countries (432)--even if the poorest Americans are better off than most of the world.

This is the great failure of the inequality alarmists generally: a myopia centered around rich countries that have seen massive growth in purchasing power for everyone. For within-country inequality to become a public policy priority, those concerned about it need to make a much stronger case. This isn't just about whether society is totally meritocratic--obviously it's not, as Piketty argues in multiple places. The problem is that Piketty has not performed an analysis of optimal inequality, choosing to rely instead on a lot of straw man arguments and vague references to "democracy." He has provided a lot of data that demonstrate that inequality in countries that produce the top 20 percent of global output is on the rise, and he has suggested policy remedies (that he claims are basically costless), but he has not made a serious attempt to convince fence-sitters that this issue should top the policy agenda.

It is hard to believe that Piketty's predictions for the future--on which his policy prescriptions rely--are much more than undisciplined speculation. He does not have a model. He has shown us historical data from which he has drawn inference using accounting-based counterfactuals and a lot of hand waving. He has made forecasts for the future paths of income and returns to capital--both of which are basically exogenous processes in the text. On these forecasts he hangs his broader predictions. His predictions are worth noting because he is a capable scholar with a tremendous mastery of the data, but his hand-wavy approach to dismissing (or ignoring) weaknesses in his framework limits the ability of his speculations to convince those who don't already agree.

Economists who write books like this have an opportunity to educate the public in economic reasoning. Thinking about macroeconomics is hard. Piketty's methods and rhetoric suggest to readers that macroeconomics is easy. He can dismiss all objections with a wave of his hand. He can ignore policy tradeoffs and potential general equilibrium effects by simply asserting them away. Someone should count how often he uses the terms "no doubt" and "clearly" when drawing huge, highly debatable conclusions about almost everything (e.g., 511). By referencing only charts (if even that) for many of his claims, he is feeding the sloppy and destructive "this one chart proves...!" fad that has spread in the blogosphere; a chart is never sufficient to make causal claims or demonstrate optimal policy. In this sense, Piketty does his readers a disservice. He should have asked them to think harder instead of just gazing at graphs. He should have accompanied his facts and predictions with serious normative arguments instead of assuming his readers automatically share his deep concerns about how the world's top 20% are faring compared to the world's top 0.1%. He should have explained the reasons many economists prefer low taxes on productive capital other than land; even if he finds such arguments unpersuasive, he robs readers of the chance to consider them when he blatantly accuses those economists of intellectual dishonesty (514).*** He should have acknowledged the massive "causal density" problem in macroeconomics and shown readers how economists investigate causal relationships and, more importantly, identify the limits of their knowledge. Instead, he preaches to the converted and to those who are easily overwhelmed by a deluge of charts, knocking down straw men but avoiding the hard questions. The book is many things, including an excellent resource for stylized facts, but serious economic analysis it is not.

Capital is tremendously informative, and Piketty's use of literary anecdote is a nice touch; but ultimately this is a chart book, with plenty of economic data but very little economics.

*Piketty devotes a grand total of two paragraphs to this idea (488-9), making two weak, unimaginative arguments against the policy. He cannot imagine a way to transition from PAYGO to private investment accounts, and he believes that trusting retirement to the markets amounts to "a roll of the dice." We know enough about optimal retirement portfolio choices to do better than dice-rolling. For someone in my generation, watching a chunk of my paycheck go toward a program based on the silly assumptions underlying Social Security is the real gamble. In any case, if Piketty truly believes that giving everyone a chance to become an owner of capital is a dice roll, he must explain why he is so certain that capital income is sure to explode in coming decades.

**His discussion of wealth inequality even includes an awkward admission: "The average global fortune is barely 60,000 euros per adult, so that many people in the developed countries, including members of the 'patrimonial middle class,' seem quite wealthy in terms of the global wealth hierarchy" (438). But the middle class doesn't just "seem" wealthy. The developed world's middle class is wealthy by any objective standard, which emphasizes my point that inequalities within developed countries are much less disconcerting that true global poverty.

***Aside from this silly accusation, Piketty never mentions optimal taxation literature aside from a handful of his own papers. His central recommendation of a global wealth tax does not read like a result of optimal taxation analysis. He claims that "it is hard to think of an economic principle that would explain why some assets should be taxed at one-eighth the rate of others" (529), as if "elasticity" and other drivers of optimal tax models are not economic principles.


  1. I'm still waiting for my library to get a copy of the book, and don't really feel like buying it.

    Anyway your post has caught my interest (along with many other reviews).

    May I respond to a few points -

    First, you say that the whole idea of endowment model is not very interesting because it means you overlook accumulation. True. But the question of inequality is independent of the change in the size of the total endowment - it is a pure distributional issue regardless.

    Certainly at any point in time we could redistribute the current stock of capital in the economy, and the new capital owners will have the same incentives as the old ones.

    You then say this, which I find puzzling

    "One cannot simultaneously claim that owners of capital stand to gain absurd riches in coming decades and that privatization and choice for Social Security is a terrible idea."

    Why not? These seem completely separate issues, and furthermore, social security is always PAYGO in terms of real resources.


    But then you say that "one way to treat the problem of poor people not owning stuff may be to help poor people, well, own more stuff"

    Which is exactly what a progressive tax and transfer system actually does. It takes stuff from people who own it and give to people who don't. What you seem to want is some magical way to 'grow' out of inequality.

    Also you make points about inequality by comparing the growth in incomes of the poorest - if the poorest are getting wealthier over time then it doesn't matter how much faster the rich are getting richer. That is a nonsense idea. The distribution always matters.


    Anyway, I'll get the book soon enough and make my own judgment. It was once to read something a little more critical of Piketty, and I will probably read it more closely now.

    1. Hi Cameron. Thanks for reading and commenting.

      Of course I realize that the question of inequality is, by definition, about distributions and not levels. What I'm suggesting is that the degree to which inequality reduction should be prioritized as a public policy issue depends in part on levels. High inequality where the bottom end of the distribution is starving to death would concern me much more than high inequality where the bottom end are driving BMWs. I worry more about poor vs. rich than rich vs. very rich. In international and historical context, developed-country inequality is about rich vs. very rich. This is not to trivialize the concerns of rich-world poor people, which I know are very real; I just want to put it in context. I'm much more concerned about global inequality, and the policies that might reduce global inequality might not necessarily reduce rich-country inequality (e.g., more immigration).

      Yes, an unexpected, one-time redistribution of wealth would not affect incentives. A permanent wealth tax of the type advocated by Piketty probably would.

      When I talk about privatization and choice in Social Security accounts, I'm considering the idea of letting people invest private SS accounts in equities. I realize that currently SS is a PAYGO system. And that article you link is nice (thanks); I can see that I need to think more about general equilibrium effects. But when the author claims that it would all be PAYGO regardless, they are assuming that we stick with a defined benefit system, in which case the returns on withheld funds are decoupled from eventual outlays. That's not necessarily how it would need to work, though I realize there will always be transfers for some people. A system in which SS funds are tied to capital instead of just loaning to the government would ease the burden on future taxpayers and give everyone a stake in capital, assuming we abandon defined benefit. Demographic trends may force us to do so eventually.

      By the way, if the difference between individual equity accounts and the current system is only an accounting distinction, as the author claims, Piketty should be including expected SS benefits as individual wealth. That would probably make inequality look a bit better.

      Poverty need not be a relative concept, aside from semantic debates. We can give it an unchanging definition if we want--something based on sufficient nutrition, shelter, etc. I don't want to push my point too far--I'm not one of those people who claims the American poor are plenty rich and deserve no attention. I did not say that "if the poorest are getting wealthier over time then it doesn't matter how much faster the rich are getting richer." I don't believe that. And I know that we're going to move the goalpost over time, which is fine. My general point is simply that the amount of policy concern I give to inequality data depends in part on whether the bottom of the distribution is being clothed and fed. There are exceptions, but that concern is rare in the US, while it is rampant globally, hence my belief that global inequality deserves more policy attention. More generally, there may be other domestic policy issues that are more pressing--such as unemployment, which is related to inequality but not equal to it.

    2. It seems we've got each other thinking in depth about this.

      Can I just make one more comment, which will probably open a can of worms because it contradicts accepted thinking, but which from my observations seems quite correct.

      A wealth tax will not be a tax on capital goods (the buildings, machines equipments). It will be a tax on monopolies, like land, patents, etc that allow firms to actually have a value (since there is no scarcity of produced capital goods - if someone who owns a machine wants to charge me more than it cost them to buy it, I will just buy it instead).

      Hence, a tax on wealth is effectively a tax on scarce resources, which, by their nature, are not created or destroyed via investment.

      In any case, if a once off wealth tax/redistribution will not affect incentives, then a permanent wealth tax will not either, since it is merely a series of once of redistributions over infinitesimally short time periods.

    3. I'm not sure I follow. If I understand correctly, Piketty's wealth tax covers everything--the value of owned businesses, including things like partnerships or stocks, along with other financial assets and land, liquid savings, etc. So the value of machines, buildings, etc is going to be reflected in the value of firms. It is definitely a tax on capital goods, and since it is recurring (annually or whatever), it effectively reduces the value of the future flow of output from productive assets. At the margin, that means fewer capital goods. I wouldn't take a stand on how large of an effect we're talking about here, but I think there are incentives at work.

      I do agree with you that a tax on things like patents or land is a very different animal from a tax on capital equipment. I talked about this here http://updatedpriors.blogspot.com/2014/03/are-landlords-future-global-plutocracy.html. Actually this is one of my other complaints about Piketty--he treats all forms of capital as the same for most of the book, which from an optimal tax standpoint seems strange to me. In my view the case for a land tax is much better than the case for a total wealth tax.

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  2. "This poses a difficult question for those who oppose some form of privatization of government retirement programs. One cannot simultaneously claim that owners of capital stand to gain absurd riches in coming decades and that privatization and choice for Social Security is a terrible idea.*"

    The operative word here is "some" as in "oppose some form of privatization of government retirement programs." Only some programs are opposed. I think you'd find that a lot of people who oppose various proposed plans (like Bush's plan a few years back) aren't opposed to all plans. There's a difference between having apprehension over the idea of what would happen if high-fee fund managers started marketing to the financially illiterate in order to skim some of those payroll tax contributions for themselves vs. offering the choice of putting some money into a low-cost diversified index fund.

    Furthermore, privatizing existing public programs isn't the only direction one can go. The Alaska permanent fund is run by a private corporation, but it isn't the result of privatizing a once public entity. If the nation were to follow suit, this would allow the larger public to reap some of the rewards from that capital without having to privatize anything that's currently publicly run.

    The contradiction you present is really only a contradiction if you limit the notion of sharing capital gains with the general public as a scheme limited to handing over our payroll taxes to high-fund managers. If you drop that assumption and consider a much wider array of possibilities, you'll see that it's not nearly the conundrum you present.

    1. Thanks Nylund, fair points.

    2. In that sense, a good argument against privatization is that the political process is likely to award much of the benefit to the financial sector rather than individuals. We've seen how they have captured a nontrivial share of the gains from the 401(k) revolution.

  3. A quick question. All the reviews talk about r>g. Should it not be about fr>g, where f is the fraction which one saves and reinvests. This immediately leads to frβ=s, where the other symbols are as in Piketty (I am still in the 11th chapter). Assuming that β does not explode, then fr should tend to g and we get the asymptotic formula β=s/g without any models. In any case, I think that 'it is all about r>g' seems misleading. I am not an economist, essentially learning a bit from Piketty's book. So I would welcome some clarification since I may be misunderstanding the stuff.

  4. It seems that I am not completely misunderstanding the stuff. Calculations of this type are in a paper of Thomas Piketty and Gabriel Zucman http://behl.berkeley.edu/files/2013/02/Piketty-Zucman_WP2013-10.pdf

    1. Yes, in an early draft of the review I talked about this more, but I cut it out. As you've seen, Piketty calls beta=s/g the "second law of capitalism," or something like that. He does not derive this in the book, but it comes from a model called Harrod-Domar. Note that it relies on a few assumptions. Growth and the savings rate are both taken to be constant and exogenous. This is a nice heuristic, actually, as is his "first law of capitalism," but as I say in the review it's odd to me that he leaves these things exogenous throughout the book. The savings rate is likely to depend on capital returns, among other things. Also, the Second Law is much less of a law than the First Law, which is actually an identity.

  5. I have not looked through their paper carefully yet. I wrote a derivation here which does not use any model only that β is bounded http://gaddeswarup.blogspot.com.au/2014/03/trying-again-to-understand-piketty.html
    Since I do not know the area, it is possible that it is not quite correct.

    1. Your derivation is not quite right. Your law of motion for the capital stock assumes that capital is only accumulated through returns on existing capital.

      Here's the derivation. Let K be capital, Y be income, s be the savings rate, and g be the growth rate. Abstract from depreciation, etc. Assume that K/Y, or beta in Piketty's text, is constant over time, as are s and g. Then:

      K(t+1)=Y(t+1)*beta for all times t
      We assume a closed economy, so total savings=total capital investment, and investment is simply the change in the capital stock. So
      sY(t)=K(t+1)-K(t) (total savings equals total investment)

      Do some substitution, so

      Note that by definition g=(Y(t+1)-Y(t))/Y(t), so we get
      beta=s/g, QED

      Allowing for depreciation just throws some extra terms in, so Piketty just defines s as savings net of depreciation.

  6. Thanks for the clarification. That should help. Time difference is the reason for late acknowledgement.

  7. Ryan - what about the effect wealth/income concentration has on growth? The reason to confine the focus on inequality to a given country is to analyze its growth prospects, no?

    The whole secular stagnation hoopola, for example, postulates that full potential requires a negative real interest rate - which is sort of a tax on wealth.

    (I realize I'm stretching two things here - but the point is just to show how wealth concentration might effect growth negatively)

    Or you could say: wealth/income concentration raises the savings rate. If productive investment does not commensurately rise, then debt or unemployment must rise.

    Perhaps the problem with wealth/income concentration is that it pushes up the savings rate at the very same time as it reduces the purchasing power that fuels demand. So there are more funds available for investment - but diminished prospects for growing businesses because of the lower demand.

    I think this partially depends on viewing demand as effecting long term growth... and for that I would love to hear your comments on this post:


    1. Hi JD, thanks for commenting.

      Piketty does not draw direct links between inequality and growth. To my knowledge there is not a good story for that yet, though I've seen Mian and Sufi make some arguments there (secular stagnation-related, as you note). There may be reasons to think the causality runs in the other direction, though, due to the relationship between output and the capital stock. Also note that the secular stagnation story (rg) have yet to be reconciled (or really spelled out rigorously at all); see Matt Rognlie's comment on this post: http://www.arnoldkling.com/blog/mian-sufi-vs-scott-sumner-and-john-taylor/

      As to your comment on the savings rate, this is related to my complaints about Piketty. Sure, it's plausible that wealth/income concentration means more savings than a more equal distribution (though it's not clear that it means this over time--relative vs. absolute matters). But two things: first, savings=investment. You need a good story for why savings would rise but investment would not. The common story for this is the ZLB, which isn't entirely persuasive (and, again, difficult to reconcile with r>g). Second, if savings becomes too large it puts downward pressure on r, weakening Piketty's r>g story. General equilibrium matters here.

      I'm not sure I buy your claim that concentration reduces purchasing power. Why should it do that? Inequality is a relative story. It's possible for everyone's purchasing power to rise even as inequality rises, which is what has happened over the time period Piketty examines.

      "More funds available for investment - but... lower demand." Investment is part of demand! This is what the secular stagnationists have yet to explain--an increase in investment and decrease in consumption is not a decrease in demand, necessarily.

      I see a lot of people embracing both Piketty's arguments and secular stagnation arguments. Right now, that's a trip down the rabbit hole. Neither is very convincing on its own; together, they become a hodgepodge of contradictions.

      I'll take a look at your post, thanks.

  8. Consider An "Optional" Net Wealth Tax

    The Piketty diagnosis sounds like the "Economy of Exclusion" described by Pope Francis a few months back. The trickle-down economic theories and global markets work to concentrate wealth at the top as they become more efficient. This growing concentration has left more and more people excluded from work and a share of wealth needed to support family life.

    Piketty’s version of a wealth tax is extreme because it is global (said to be needed to prevent wealth from leaving the country) and has a progressive rate structure (for no necessary reason). His design may reflect problems with the implementation of a "soak the rich" style wealth tax in France.

    A global wealth tax is not needed because the U.S. has maintained a worldwide tax jurisdiction and already requires that overseas assets be reported to the Treasury under penalty of a felony. Consider the same rates for rich and poor – 8% on income, no payroll taxes and 2% on net wealth (excluding $15,000 cash and $500,000 in retirement savings). Even C corporations could be taxed at a flat 8% with a 4% VAT - (considered the fairest way to apportion taxes among businesses worldwide).

    For individuals who want to avoid a 2% net wealth tax, there would be nothing wrong with an optional flat 26% income tax rate (and capital taxes on gains, gifts and estate taxes later). An optional net wealth tax paired with very low income tax rates is, at least, politically cognizable. According to Bill Gates (speaking at AEI on March 13, 2014) the elimination of payroll taxes is also the best way to encourage full employment.

  9. This is probably the best review I've read of Piketty's book. Thank you for writing it.

  10. I see Mathew Yglesias on Vox lists this review a being "from the right." I wonder what you think about this characterization. I don't see anything especially right-wing about your excellent review.

    1. Thanks for the comment, ed. I agree. I don't really have strong political preferences, and I think asking Piketty to address the optimal tax research and endogenize a few things would be pretty standard in an econ seminar room, regardless of politics. I said as much to Yglesias, and he graciously conceded the point: https://twitter.com/mattyglesias/status/453602088011182080

  11. Ryan,

    Thanks for this thoughtful comment.

    One things that raised a red flag was this: "This is not the only possible alternative to taxation, but it is a reminder that one way to treat the problem of poor people not owning stuff may be to help poor people, well, own more stuff."

    Well, maybe. Past experiments with encouraging ownership, particularly home ownership, turned out to have some very bad side-effects. As a result, I'm wary of social engineering aimed at encouraging ownership.

    1. That's certainly a fair point. I agree that home ownership policy has probably had some nasty consequences (though, to be fair, most of it is really about home borrowership).

      I am not here advocating any specific policy, but given that our current pension system (Social Security) is already a huge social engineering project, my prior is that replacing it with an ownership-based program isn't likely to be much worse.

  12. "Capital is tremendously informative, and Piketty's use of literary anecdote is a nice touch; but ultimately this is a chart book, with plenty of economic data but very little economics." -

    A chart book? Like the highly praised tome "This Time Is Different" by GM Rogart et al.? LOL you economists make me LOL.

    1. Thanks for reading, Ray. As a general rule I don't find arguments that treat "economists" as a homogenous group very useful. In any case, as I said early in the review Piketty's data assembly is a big contribution, as was the Reinhart & Rogoff book. Beyond that, I don't remember my thoughts about the theoretical and speculative aspects of the latter well enough to comment.

  13. A very good and thoughtful review.

  14. First, great review. Few comments. I am a tax lawyer, not an economist, and am from the right.
    Tax on capital very hard to enforce and will normally be full of loopholes. In effect a tax on capital is a wealth tax, assessed like the estate tax, only on an annual or on time basis. IRS is required to devote substantial resources to estate tax, which produces very little money, while it tends to be full of loopholes so it is only levied on those who fail to plan.
    Point 2, capital tax, even one time capital tax will have massive impact on incentives as do high income taxes. People save, invest, take chances,and work (things all key to economic growth) so they can either keep and spend the money or leave to their heirs. As one of my friends says, it is not what you make that counts, it is what you keep. Another example of incentives created by one time events, look at multinational corporations, they were offered a lower rate of tax to bring home funds once, and now keep fond offshore until another one time tax break occurs. Also an annual capital tax will cause individuals to move capital into hard to value assets (or create structures with discounts), which will likely not be optimal capital allocation for economic growth.
    Next, as an investor most of what Piketty says contrary to the world as we know it. The Fed is engaged in financial repression, which reduces the return from capital to below market rates, so "safe" real returns are very low, often below inflation. Since 1998 the S & P has returned less than a 5% return.
    And I would also add, just for fun look at breakdown of share of AGI by income groups since 1998 (10998 to 2011). Shares of income have not changed, yet means tests assistance has greatly increased, so hasn't income inequality gone down?

    1. Thanks for your comment. I wish I had a stronger grasp of tax law...

  15. Excellent review, the best I've seen so far. The fact that Yglesias marked it as "from the right" shows how useless these commentators are.

    Any attempt to a serious criticism is an uphill battle. Not because it would is difficult, as you clearly show, but because he does not conform to the language and norms of economics as a peer-reviewed science, so he can pretty much state anything he wants. The size of the book only add to the confusion, because he does say everything that critics could use to attack him. When he adds everything up, it's not clear how he did the sum, what figures he added. This is pure politics, it would never pass peer-review.

    Deirdre has always been right: rethoric is all that counts. Harrod - Domar now has become the second fundamental law?

    1. Thanks for the comment. Yes, the Yglesias thing was so puzzling. It's so annoying that everything must be seen through the Right/Left lense. I don't have strong preferences about most policies, including the global wealth tax. I just wanted Piketty to give some minimal attention to the taxation literature and general equilibrium concerns! Apparently that makes me a conservative.

  16. "This is the great failure of the inequality alarmists generally: a myopia centered around rich countries that have seen massive growth in purchasing power for everyone. For within-country inequality to become a public policy priority, those concerned about it need to make a much stronger case". From what I understand, the problem with inequality is not only poverty, but also power: richer people have more influence on policy-making than poorer ones and this tends to skew the political field in favor of the economic advantaged. So, in my view, within-country inequality should be a public policy priority even if it does not have anything to do with poverty.

    1. Yeah, I think that is the best argument for concern. I don't know relevant research on the subject. I can think of examples where this didn't happen--think of the Robber Barons' inability to prevent passage of the Sherman Act. But if wealth concentration leads to political capture, it's worth worrying about.

  17. Thanks for this great review -- I really enjoyed it!

    If you ever do a follow-up, you might find this interesting: www.quandl.com/PIKETTY.

    This is basically a collection of all the raw data tables in Piketty's book, stripped of all extraneous formatting, easy to graph, and downloadable to Excel, Stata, R, Python or the analysis tool of your choice.

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  20. Agree with much of this, although in general I think the world could use a bit more inequality alarmism. Thanks for writing! (and reading... I wish I had just read the charts)

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