Saturday, May 17, 2014

Greg Mankiw — More on Piketty


In More on Piketty, Greg Mankiw directs our attention to two studies showing that the appearance of inequality is an illusion. Did Professor Mankiw actually read these?

Abstract—In his book, Capital in the 21st Century, Thomas Piketty highlights the risk of an explosion of wealth inequality because capital is accumulating faster than income in several countries including the US and European countries such as France. Our work challenges the conclusions of the author in three steps. 
First, the author's result is based on the rise of only one of the components of capital, namely housing capital, and due to housing prices. In fact, housing prices have risen faster than rent and income in many countries. It is worth noting that "productive" capital, excluding housing, has only risen weakly relative to income over the last few decades. Over the longer run, the "productive" capital/income ratio has not increased at all. 
Second, rent, not housing prices, should matter for the dynamics of wealth inequality, because rent represents both the actual income of housing capital for landlords and the dwelling costs saved by "owner-occupiers" (people living in their own houses). Logically, to properly measure capital, the value of housing capital must be corrected by measuring it on actual rental price, and not housing prices
Third, when we apply this change, we find that the capital/income ratio is actually stable or only mildly higher in the countries analyzed (France, the US, the UK, and Canada) except for Germany where it rose. 
These conclusions are exactly opposite to those found by Thomas Piketty. However, this does not mean that housing prices do not contribute to other forms of inequality. When housing prices rise, owners of the housing capital hold a higher value that can be transformed into consumption. It is also more difficult for young adults to become homeowners. Housing incomes of owners however do not necessarily increase which casts serious doubt on Piketty's conclusion of a potential explosive dynamics of inequality based on these trends.
Huh? Did they read the wrong book?

Paris Institute of Political Science
Does housing capital contribute to inequality? A comment on Thomas Piketty’s Capital in the 21st Century
Odran Bonnet , Pierre-Henri Bono, Guillaume Chapelle , Etienne Wasmer

Wringing one’s hands about inequality seems like the new national pastime. According to emerging conventional wisdom, those born-rich will hoard all the wealth and leave everyone else behind. It's a new gilded age, the economist Paul Krugman recently declared, “But we've known it for a while.”
In response to the public outcry, several prominent economists are proposing an annual wealth tax, which would apply only to those with assets worth more than a set amount. But there’s limited evidence that wealth inequality has actually worsened in the United States in the last 30 years. And, even if it does eventually get worse, imposing a tax on wealth is a terrible way to promote equality. It actually benefits the super wealthy the most....
For now, there is limited evidence that wealth inequality has changed or that we are in a new gilded age. But even if we do get there someday, the proposed cure, taxing wealth, will make the disease worse.
Move along. Nothing to see here.

Foreign Policy
The Inequality Illusion: Why a Wealth Tax Won't Work
Wojciech Kopczuk and Allison Schrager

1 comment:

Matt Franko said...

I believe at one point "Dr Koop .com" was worth $1B of capital for the 21st century...

Even GE was once worth near $500B now it is worth half of that...

The govt still has the conforming loan limit set at $417k from around half of that back at the time GE was selling for $500B...

So housing is still a double while GE is now 50% off....

MMT can explain this as "the price level is ultimately a function of prices paid by govt" so as the govt will currently pay up to $417k for a house, the housing prices are higher, while the GE business has not enjoyed such govt support and the price has fallen...

Maybe this is what Mankiw is getting at...