Matt Rognlie — A note on Piketty and diminishing returns to capital

Abstract

Capital in the Twenty-First Century predicts a rise in capital’s share of income and the gap r g between capital returns and growth. In this note, I argue that neither outcome is likely given realistically diminishing returns to capital accumulation. Instead—all else equal—more capital will erode the economy wide return on capital. When converted from gross to net terms, standard empirical estimates of the elasticity of substitution between capital and labor are well below those assumed in Capital. Piketty (2014)’s inference of a high elasticity from time series is unsound, assuming a constant real price of capital despite the dominant role of rising prices in pushing up the capital/income ratio. Recent trends in both capital wealth and income are driven almost entirely by housing, with underlying mechanisms quite different from those emphasized in Capital.

A note on Piketty and diminishing returns to capital
Matt Rognlie
(h/t Brad DeLong)

Brad DeLong comments at WCEG — The Equitablog,  Daily Piketty: Matt Rognlie Has a First-Rate Critique

In the framework in which Matt using, the fall in the wealth-to-annual-net-income ratio from 700% in the late Belle Époque Era to 300% in the post-World War II Social Democratic Era ought to hav greatly increased the salience of capital and its ownership in income. As best as I can quickly calculate on the back of my envelope , if we calibrate the Belle Époque to Rognlie’s model, the model sees income from capital back then as roughly 18% of net total income–less than half of its actual value–and sees a sharp rise in the capital share of net income to 25% in the post-WWII Social Democratic Era. That did not happen. Something else is going on that Matt is not modeling…