Monday, April 14, 2014

Noah Smith — R vs. g

In his new book, Thomas Piketty argues that R, the rate of return on capital (which is different than the safe interest rate "r") is greater than g, the rate of economic growth, and that this fact can be expected to continue into the indefinite future, resulting in an ever-rising capital share of income and an ever-falling labor share. The big question is whether R really will be greater than g into the foreseeable future.

It occurs to me that this is just the "robots vs. globalization" argument all over again....
These explanations aren't mutually exclusive, of course. But in terms of policy, if the "rise of the robots" is the biggest factor, we need to think about all kinds of difficult policy decisions and welfare arguments. But if globalization is the main reason for R>g over the last 4 decades, then all we can do - and all we should do - is wait for the big wave to end.
Why either-or and not both-and? Seems to me that both factors are operative. The result of technological innovation has been greater distributed leisure and we can expect that to continue as long as workers maintain bargaining power.

However, it is going to be along time before the global labor glut has been overcome considering the situation in most of the world. During this time — the foreseeable future — workers in emerging countries can look forward to improving job opportunities and rising wages, while workers in already developed countries can look forward to few job opportunities, job opportunities of generally lower quality, and lower pay.

In addition the rate of growth in the developed world is lagging and promises to lag for the foreseeable future, while the rate of growth in the developing world is forging ahead. However, global ownership is dominated by investors from developed countries and so the rate of capital accumulation in the developed countries can be projected to greatly exceed the growth rate.

Noahpinion
R vs. g
Noah Smith | Assistant Professor of Finance, Stony Brook University

6 comments:

Anonymous said...

Why not start thinking very boldly: Piketty's call for a global wealth registry and global taxes: use proceeds for a global job and investment program.

Brian Romanchuk said...

Wealth inequality exploded since 1982 because we had a stock bull market since then. This bull market coincided with a downward trend in interest rates, inflation. It also coincided with the baby boom generation piling huge amounts of capital into pension funds.

All of those trends have ended, and the demographic push is going into reverse. It seems unsafe to extrapolate high returns on capital indefinitely.

Anonymous said...

But the trends Piketty studies go back 200 years.

Detroit Dan said...

I agree with Brian. There are cycles within cycles, and the latest increasing return to capital has run its course.

Going back 200 years brings in all sorts of other factors (including wars, safety net programs, income taxes, etc.)

I'm in favor of thinking practically as well as boldly. Strengthening the already existing gift and inheritance tax, for example, would have a lot of benefits.

I'm a big fan of MMT because it's an evolutionary approach. We have made progress as a society from the bad old days. Marx's dire predictions regarding capital haven't come true. There are a lot of things in modern economies that work. Let's build on these.

I do appreciate the need for more coordinated global economic regulation. But the global wealth registry and accompanying taxes proposal would obviously meet resistance from most of the people who hold power around the world. We're not going to defeat these people with a bold frontal assault, in my opinion. Rather, we need to find areas of common interest and work together to deal with the problems that will engulf rich and poor.

Matt Franko said...

Dan,

there are people out there going around saying Pinterest is worth $8B.... this firm has NO REVENUES...

I assume there is a small cadre of people who own this Pinterest firm...

So if we go to "tax their new $8B of wealth", where are the Pinterest owner people going to "get the money" to be able to pay a few $B of taxes?

And what about a case where the value of a firm collapses? remember "Wang" and "Digital Equipment Corporation", if the value collapses, do the previous taxpayers "get their money back"?

all the dot com stuff where "Dr Koop.com" went to over $1B?... Dr. Koop didnt have a few $100M to pay some sort of "new found wealth tax" all he had were his shares.

Most "wealth" wouldnt even exist if the present owners were forced to sell within 30 days....

Anonymous said...

So if we go to "tax their new $8B of wealth", where are the Pinterest owner people going to "get the money" to be able to pay a few $B of taxes?

Oh, boo hoo. Maybe they will just to give back the money people gave them to buy their worthless stock, then?