Tag Archives: #Piketty

Moisés Naím: The Problem With Piketty’s Inequality Formula – The Atlantic

Moises NaimWho is to blame for the dramatic rise in inequality in recent years? The bankers, many people say. According to this view, the financial sector is guilty of triggering the global economic crisis that began in 2008 and still affects millions of middle-class families in Europe and the United States, who’ve seen their purchasing power diminish and job prospects wither. The outrage is amplified by the fact that not only have the bankers and financial speculators escaped punishment for their blunders, but many are now even richer than they were before the crash. Others blame growing inequality on wages in countries like China and India, where low salaries depress incomes of workers in the rest of the world. Asia’s cheap labor compounds the problem because it creates unemployment in countries where companies close factories and “export” jobs to cheaper markets overseas. Still others see technology as the culprit. Robots, computers, the Internet, and greater use of machines in factories, they say, are replacing workers and thus boosting inequality.

The true explanation is a lot more complicated, says Thomas Piketty, the French economist whose influential Capital in the Twenty-First Century has turned into a global sensation. In many countries, Piketty argues, capital (which he equates with wealth in the form of real estate, financial assets, etc.) is growing at a faster rate than the economy. The income produced by capital tends to be concentrated in the hands of a small group of people, whereas income from labor is dispersed throughout the entire population. Therefore, when capital earnings increase faster than wages, inequality grows because those who own capital accumulate a higher proportion of income. And given that growth in wages is directly dependent on the growth of the economy as a whole, economic inequality is bound to get worse if the economy expands at a slower clip than capital earnings.

Piketty summarizes this complicated theory with the formula “r > g” where “r” is the rate of return on capital and “g” is the rate of growth in the economy. The future is dire, he concludes, because he expects the economies of the countries he surveyed to grow at a rate of 1 to 1.5 percent per year, while the average return on capital increases at a rate of 4 to 5 percent per year. Inequality, in other words, is bound to rise. To avoid this, Piketty calls for a progressive tax on wealth in large countries—an idea that even he concludes is utopian. He acknowledges the enormous political hurdles that his proposal would face and the huge practical difficulties that would accompany its implementation. Last week, the Financial Times claimed that it had found grave defects in Piketty’s work, provoking an ongoing debate about his analysis. Nonetheless, most impartial observers believe that the issues with Piketty’s data are not serious enough to completely discredit his overall conclusions.

[. . .]

In order for this discussion to be valuable, however, the problem requires a more complete diagnosis. It is not accurate to assert that in countries like Russia, Nigeria, Brazil, and China, the main driver of economic inequality is a rate of return on capital that is larger than the rate of economic growth. A more holistic explanation would need to include the massive fortunes regularly created by corruption and all kinds of illicit activities. In many countries, wealth grows more as a result of thievery and malfeasance than as a consequence of the returns on capital invested by elites (a factor that is surely at work too).

Click  www.theatlantic.com to read the full article.



On Inequality Denial – NYTimes.com

Paul Krugman

A while back I published an article titled “The Rich, the Right, and the Facts,” in which I described politically motivated efforts to deny the obvious — the sharp rise in U.S. inequality, especially at the very top of the income scale. It probably won’t surprise you to hear that I found a lot of statistical malpractice in high places.

Nor will it surprise you to learn that nothing much has changed. Not only do the usual suspects continue to deny the obvious, but they keep rolling out the same discredited arguments: Inequality isn’t really rising; O.K., it’s rising, but it doesn’t matter because we have so much social mobility; anyway, it’s a good thing, and anyone who suggests that it’s a problem is a Marxist.

Curated from www.nytimes.com


Rima NYT Comment SmallThe Giles piece, in many ways, is worse than the Reinhardt and Rogoff “error.” There is no error here; only an attempt to tarnish and discredit, all a part of the right’s mission to pull the wool over the world’s eyes. That’s right. I am saying it. The right wing conspiracy is an international one.

It’s really sad that the Financial Times is complicit in the lie. It’s sad that so many of the trusted institutions that make up the media are divided between right and left, truth and lies, facts and fiction – engaging in propaganda.

That Piketty’s book contained errors is normal for such a huge book. US data, the lion’s share of capital, was not in question. The errors change nothing. 

To read the rest of my comment, click here.