Monday, April 28, 2014

Piketty and the Macroeconomists

I have not read a word of Thomas Piketty's Capital in the Twenty-First Century. As far as I can understand from secondhand and thirdhand accounts, it has something to do with outrage about the wealthy, measuring the rate of return on capital, and how we can tax those worthless wealthy bastards. The quotes and reviews on Amazon use words including "pioneering," "explosive," "seminal," "magisterial," etc. Some people want to petition the Pope to put Piketty in line for sainthood. This is pretty exciting. I think I should buy the book, and would be happy to contribute to Piketty's wealth. Hopefully he won't be successful in taxing himself back into poverty.

Tyler Cowen points out that there is a body of research studying wealth inequality, which apparently Piketty does not reference. This surprises me. After all, Paul Krugman (a very serious, straightforward, and trustworthy scholar, if there ever was one) points out that:
...if you think you’ve found an obvious hole, empirical or logical, in Piketty, you’re very probably wrong. He’s done his homework!
This bears investigating, I think.

57 comments:

  1. "This bears investigating, I think."

    Surprise me. Investigate it.

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    Replies
    1. Surprise the rest of us -- shut up until you know something worth speaking.

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    2. Maybe it's surprising that I have other priorities for the time being than reading 671 pages of what may unsurprisingly not be a modern classic. But I love surprises.

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    3. Sadly it's no great surprise that Tyler Cowen goofed, but to his credit he has acknowledged the fact. He has updated his post to say that Piketty did, in fact, discuss this work in 2010. Here's what Piketty had to say about it:

      "...one key driving force in these models is naturally the macroeconomic importance of inheritance flows: other things equal, larger inheritance flows tend to lead to more persistent inequalities and higher steady-state levels of wealth concentration. However this key parameter tends to be imprecisely calibrated in this literature, and is generally underestimated: it is often based upon relatively ancient data (typically dating back to the KSM controversy and using data from the 1960s-1970s) and frequently ignores inter vivos gifts. We hope that our findings can contribute to offer a stronger empirical basis for these calibrations."

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    4. What I'm curious about is what is in Piketty's book, not what he mentioned in 2010. How does Piketty put his work in the context of the literature on inequality, economic growth, etc.? Does he have a rigorous theory to structure his arguments?

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    5. My copy arrived just this morning, so you will be spared my synopsis for some time. With luck I might churn out the 10,000th review of the book in a month or two. (By that I mean bad luck, i.e. lousy weather keeping me indoors.) But with regard to the sort of quibble Tyler Cowen raises, it's worth noting that in order to avoid making the book even longer, Piketty has put lots of material at: http://piketty.pse.ens.fr/en/capital21c2

      He makes it clear that he expects economists to treat that material as part of the package.

      Also worth noting that Brad DeLong has answered your questions with a 'No', in the sense that he wants a theory:

      http://equitablegrowth.org/2014/04/12/notes-finger-exercises-thomas-pikettys-capital-twenty-first-century-honest-broker-week-april-12-2014/

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    6. Steve, the last time you generated a "rigorous theory" the whole econoblogosphere lol'd it into it's personal rejected pile. A reminder: http://marginalrevolution.com/marginalrevolution/2013/12/what-is-the-evidence-on-quantitative-easing.html

      Does Piketty have a "rigorous" theory? OK, define "rigorous" rigorously, please. Then we can talk about your question. Here's a better idea though: read the book before you knock it.

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    7. Piketty's book does not contain explicit references (to the best of my knowledge) to the two-decade-old body of work on macroeconomics and inequality beginning with Huggett and Aiyagari. Neither does the book's online appendix, but if you follow the links provided in this appendix to other papers that Piketty and co-authors have written you will find references to some of this work. (That does not count as a citation in my book but it shows at least that Piketty is evidently aware of some of this work.) But for reasons that are unclear to me Piketty does not seem persuaded by papers like Castaneda, Diaz-Gimenez, and Rios-Rull (JPE, 2003) which match most of the facts about U.S. income and wealth inequality with parameters calibrated more-or-less reasonably. Instead in his book (which I have still not yet finished) and in a very recent paper (April 2014) with Zucman he seems to favor fairly mechanical models with multiplicative shocks to individual wealth accumulation. These models generate power laws for the upper tails with coefficients that evidently depend on the now-infamous "r-g" (i.e., the difference between the interest rate and the growth rate). But he does not make much of an attempt to calibrate them as do Benhabib et al (Econometrica et al, 2011). My overall impression so far is that Piketty does not really engage the existing literature on income and wealth inequality. Maybe this is because he focuses almost exclusively on the upper upper right tail of the wealth distribution (not just the top 1% but the top 0.1%). Krusell and Smith and Castaneda et al and others do a pretty good job of matching the top 1% but perhaps (and I am not sure about this) less well on the top 0.1%. But then in his book he makes bizarre statements like "the profession [has an] undue enthusiasm for simplistic mathematical models based on so-called representative agents". He knows this is not true! (He was even a discussant for Quadrini and Rios-Rull's forthcoming chapter on "Inequality in Macroeconomics" in the Handbook of Income Distribution.) Inexcusable.

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    8. Piketty has to use models with power laws, because he doesn't know how to solve models on the computer.

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  2. Kevin Donoghue is so tiring because he is so lazy; nothing that he suggests must take the time of anyone who encounters his demands. Kevin--do you it yourself.

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  3. "As far as I can understand from secondhand and thirdhand accounts, it has something to do with outrage about the wealthy, measuring the rate of return on capital, and how we can tax those worthless wealthy bastards."

    You are making progress and no more pretending that you are not a right-winger.

    For all those who are not clouded by ideology, Piketty has done tremendous empirical work and shown that income inequality is rising because it is mainly the top 0,1% who are becoming richer. All the classical explanation (skill-biased technological change and so on) would work if the rise of incomes could be seen among the top 5% or top 1% as we would then know that it is professionals, doctors, lawyers and so on, who are becoming more productive.

    But the top 0,1% are either CEOs who, due to corporate governance problems (people in top management basically collude in order to extract rents from the owners of the company they work for), do earn far more than they produce (there are many solutions to this problem, the most radical free market version being the one in which CEOs are forced to put a part of their equity into the company so that they share not merely the upside risk via stock options but also the downside risk) or people like the Kochs who inherited their wealth.
    You also do not have to be a political scientist to understand that 19th century inequality will give us 19th century politics, i.e. more oligarchic than democratic.

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  4. More of the same. Wrong diagnoses. Wrong prescriptions.
    The amazing chart Piketty produced tells me only one thing - Fed produced bubbles have raised top 1% incomes through temporarily inflated asset price gains. If you want to cure that, clamp down the insane Fed policy.

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  5. Yeah, you can totally explain a long-run (~ 40y) trend with asset price bubbles. ^^

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  6. ITT, Stephen Williamson becoming the Paul Krugman of scholars who don't like Paul Krugman:

    Bitter,
    Angsty,
    Embraces bulverisms

    Guess I'll stick with MoneyIllusion, where useful contra-Krugman discussions can be found.

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    1. "ITT, Stephen Williamson becoming the Paul Krugman of scholars who don't like Paul Krugman:

      Bitter,
      Angsty,..."

      That would be a Bulverism, I think.

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    2. There is nothing useful at MoneyIllusion.

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  7. Stephen, you do not need to contribute to Piketty's wealth. Just walk across the hallway and borrow it from a colleague. Or borrow it from the WashU library. Or just read the 30 or so reviews of the book that you can find online for free, and then you pretty much know what is going on, without even reading one page of the book itself.

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  8. BTW, the market seems to be valuing this book fairly high.
    Amazon is out of stock of the book.
    Used copies are costing three times as much as the posted new price for the book.
    And there is one collectible at $150.00 (seven times the posted new price).
    So, you see Stephen, write a book like Piketty's and despite your detractor's, you may get into the 0.01%ers.

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    1. Here is another example of a former best-seller:
      http://www.amazon.com/Head-Coming-Economic-Battle-America/dp/0446394971

      Today, one can only laugh at the title. Market success says nothing about how profound or correct the ideas of the book are.

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    2. "Stephen, you do not need to contribute to Piketty's wealth. Just walk across the hallway and borrow it from a colleague. Or borrow it from the WashU library. Or just read the 30 or so reviews of the book that you can find online for free, and then you pretty much know what is going on, without even reading one page of the book itself."

      I have to admit, it doesn't seem too promising, but sometimes the people who write these reviews and such haven't read it either, so we should give the guy a chance.

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    3. Thomas Piketty is obviously a serious scientist as years of him publishing in the top journals of his profession attests to. So I would approach the idea of reading his stuff with a positive attitude regardless of what reviewers have to say about it.

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    4. Read Bob Solow's review: http://www.newrepublic.com/article/117429/capital-twenty-first-century-thomas-piketty-reviewed

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  9. David Brooks has a nice piece that reflects my view of modern left pretty closely.
    http://www.nytimes.com/2014/04/25/opinion/brooks-the-piketty-phenomenon.html?_r=0

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    1. "Third, emphasize that the historically proven way to reduce inequality is lifting people from the bottom with human capital reform, not pushing down the top."

      This piece neatly shows that the right has, as usual, not paid attention to the facts. Ever since Piketty and Saez we have known that the it is not the incomes of people with a large stock of human capital like doctors, lawyers, academics and so on are which are rising but the incomes of the top 0.1%, i.e.heirs and CEOs.

      Furthermore social democrats, people who advocate for moderate capitalism and thus stabilize the system (as many people have pointed out, Roosevelt's greatest achievement was to save capitalism from the capitalists and prevent what happened in Europe and Asia: the rise of an alternative like communism and fascism), are centrists and not left-wingers. Left-wingers and right-wingers are people who destabilize the system, the former by creating anti-capitalists forms of political and economic organization and the latter by creating anti-democratic, oligarchic societies.

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    2. CEOs do not have large stock of human capital? What is the average years of education of your average CEO? Come on now! By the way, the second biggest group is indeed medical professionals, while lawyers rank forth. Only 4% of them are non-working. Here are the percentages in 2005.
      http://economix.blogs.nytimes.com/2011/10/17/the-top-1-executives-doctors-and-bankers/

      Who is not paying attention to the facts?

      The problem with the right is that it has ostracized reasonable people like David Brooks.

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    3. By the way, all these inequality studies look at pre-tax income, and ignore in-kind transfers to the poor (Medicaid, etc.). If you take those into account, inequality s reduced substantially.

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    4. Of course CEOs are highly productive. But if you had ever worked outside of academia you would know the corporate governance problems that make top management basically colludes to extract rents from the company, i.e. a significant part of their pay is due to rent extraction.

      Now admittedly the issue is more complex. I do for example think that workers have been so well off in the post WWII area because they have been able to get a large share of the "rent pie" (when a company has monopoly power people it gains monpoly rents and they somehow have to be distributed among capital and labour).

      So yeah, I am not beating up on CEOs. I am beating up on all the moronic economists who still believe that incomes perfectly reflect productivity and that Eisenhower era tax rates would have serious disincentive effects and be leftist lunacy. There are ample of lunatic lefties but you won't find them any of them among classical economists (and despite all the comparisons with Marx, Piketty is a mainstream guy).

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    5. "But if you had ever worked outside of academia"

      You assume I haven't! Careful!!

      Also, I am curious about which economists you have in mind. Principal-agent problems are well recognized. The question is, why do stockholders, some of which are institutional investors, fall victims to such practices? Why do private equity funds, which make a living by taking over and replacing less competent CEOs, not address this issue? As you say, this is a complex problem and not clear at all. So what is moronic here is the view that it can be addressed by taxing everyone who makes "too much" according to their standards.

      Piketty is crazy for making bold forecasts (he should know by now this is a bad idea) and for believing that a global wealth tax is politically feasible. Otherwise, he is certainly not a Marxist. I am not sure who claims that he is.

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    6. Piketty admits that his proposed solution is not politically feasible and we all know that taxing flows/ income is far easier than taxing stock / wealth.

      The key issue at hand here is actually not inequality but democracy. It is apparent that the right doesn't mind the "political externality" of increasing income and wealth inequality: oligarchy. Sure, we can have all those democratic formal structures but there is no democratic substance if a few rich and thus powerful people pull the strings (and I don't care whether they are called Koch or Soros). Left-wingers and centrists (guys like Krugman and Piketty would get labelled something like neoliberal scum by left-wingers) on the other hand do care.

      Income inequality is not an issue if it reflects productivity inequality and doesn't impact wealth inequality and thus undermines democracy. Yet the two conditions are not satisfied right now, CEOs earn gigantic sums even if they ruin their company and it is not Jane and John Doe who control politics anymore but corporations and rich individuals.

      So yeah, it is not envious lefties who wanna tax people based on arbitrary criteria but oligarchical right-wingers who don't give a sh*t about the slow but steady demise of democracy and who would perhaps even appreciate a second Gilded Age.

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    7. "it is not Jane and John Doe who control politics anymore but corporations and rich individuals."

      Some evidence here would be nice. You mean Buffet? Ted Turner? Bill Gates? Or the Koch's? Because I do not see a united front here. By the way, if CEOs are defrauding people, they are defrauding some pretty rich people (those who own large amounts of stocks). Again, what is going on? I cannot talk about all lefties, but I can point to your two big problems: 1) You have anger issues, and 2) you think you have figured everything out. The two remedies are 1) get laid and 2) grow up.

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    8. "What is the average years of education of your average CEO? "

      At least 12, although there are exceptions. The confusion of luck with skill continues, and if you doubt this consider Carly Fiorina or Chainsaw Al. When their luck runs out bad things happen,

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  10. The book is 700 pages long - a big ask - and goes on about Marx.

    Some people were watching the other channel when the Berlin Wall fell.

    If he does not like rich people, he should just say so,

    Book reviews serve the same purpose as film reviews. They are filters for our time.

    I made a time management decision to not read a long book plenty of others reviewed and some even understood.

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  11. Steve, dont you think Fed policy has a lot to do with inequality? Had we let the financial system chips fall where they may in 2008, the income distribution would look a lot different today. No need for wealth distribution, let the market work instead of thwarting it with corporate welfare.

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    1. Some of what the Fed does certainly has redistributive effects. But I don't think that the income distribution would look "a lot different" today without the Fed intervention that occurred in 2008. Though the question is: which way would it go? Some people think that the Fed just helped out the wealthy at the expense of main street. Others seem to think that the recession would have been deeper, and that the poor do relatively worse the deeper the recession.

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  12. if we had perfectly competitive markets, inequality would never be an issue. So inequality is prima facie evidence of monopoly power and political markets failure. dont blame markets

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    1. "if we had perfectly competitive markets, inequality would never be an issue."

      That doesn't make any sense. We can have perfectly competitive markets and still have inefficient outcomes.

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    2. I spy with my own eye a person in desperate need of an education. Read Kartik's book and come back.

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  13. this is Mancur Olsen 101. Stable democracies accrete monopoly power - inequality stems here. Wealth redistribution a la Piketty is poorly thought out cascading interventionism - never mind second best, try theory of tenth best. the solution is remove the accretions of special interest monopoly power - but that's tied to political market failure so good luck with that. Olsen thought only cataclysmic events like war couild break the ham

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    1. I have a really hard time believing that the only reasons markets are so imperfect is because of "the government". There are numerous factors contributing to imperfect markets, political subterfuge fails to explain most. That said, I'm not disagreeing that special interests have distorting consequences.

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  14. Olsen would not be considered one of the political science giants if all he said was "its the governments fault". we have plenty enough third-rate libertarian wannabes to do that for us

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  16. What I'm curious about is what is in Piketty's book, not what he mentioned in 2010. How does Piketty put his work in the context of the literature on inequality, economic growth, etc.? Does he have a rigorous theory to structure his arguments?

    I suspect that Piketty is not only an economist but probably an historian. In fact he is probably more an historian than an economist. This is the difference between him and Sargent (by the way in ref to your other thread - Sargent is not an historian and would not be considered seriously as one).

    You do not use theories or models in history. Very basic rule. You use primary documentary evidence and data - concentrating on what it means - ie understanding the institutional and other context. Models shape your conclusions - and therefore are considered dangerous things in history. Models come, if they do, at the end of historical investigations, not at the beginning.

    I have not read Piketty yet, but I suspect the references to contemporary literature are used as part of evidence collated to document contemporary issues - such as those of discussion - of the time.

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    1. Historians use models, they just use incomplete and extremely vague ones. And they use them badly.

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    2. At least their vague models deal with the one element of the state space that matters, the real world, as opposed to most models published in academic journals.

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    3. "Historians use models, they just use incomplete and extremely vague ones. And they use them badly"

      You are right some extent Anonymous. At least though they are aware of the dangers and try not to fall into them!

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    4. "How does Piketty put his work in the context of the literature on inequality, economic growth..?"

      Since it has Solow's approval, it must be relatable to neo-classical growth theory. However, the conclusions - that capitalism has intrinsic tendencies towards clusters of capital accumulation, divergence, inequality,disequilibrium and instability is classic Marxian theory.

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    5. "At least their vague models deal with the one element of the state space that matters, the real world, as opposed to most models published in academic journals."

      Sure they do. And I just had sex with January Jones.

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    6. January who?

      Anyway, I defer to my favorite west-coast Brit:
      http://rogerfarmerblog.blogspot.com/2014/04/teaching-economics.html

      And if this is not good enough, I will be happy to send you my recent paper (under review) highlighting one methodological victory of economic historians (over a group of growth theorists).

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    7. You seem to have misunderstood Roger's point. Not surprising, given that you misunderstand a great many things.

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    8. Dear claritin, why don't you enlighten me? Or are your insults a desperate attempt to hide your lack of substance?

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    9. Hee hee, you're answering me! My insults carry the day! Go meat!

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    10. Isn't it amazing? I admit, I will go to any length to delay grading undergraduate homework! And yet, I still think I understood Roger's points (there are several) quite well.

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    11. Well, you're certainly entitled to think you understood them.

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    12. Well, so are you. (How long should we keep this thread going?)

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    13. I am not asserting I understood them, I am asserting you did not. I can do this all day, and will if it keeps you from polluting the academy with crummy papers.

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