Understanding Piketty: Merit and rent in a growing economy
Enrico Minelli 19 December 2014
Growth and inequality are back at the centre of the economic debate. This column presents a framework for interpreting Thomas Piketty’s data based on Paul Romer’s model of endogenous growth. Two balanced growth regimes are possible in this framework: one (‘merit’) with a low capital–output ratio, a high interest rate, and high growth; and another (‘rent’) with a higher capital–output ratio, a somewhat lower interest rate, and much lower growth. An increase in the returns to physical capital accumulation compared to innovation could explain a shift from ‘merit’ to ‘rent’.
The publication of Capital in the 21st Century (Piketty 2014) has put the issue of growth and redistribution back at the centre of the economic debate, both in academic and in policy-oriented discussion.
Almost every commentator has praised Piketty and his coauthors for the painstaking work of data collection on the long-run evolution of income and wealth. Their interpretation of the data, and even more so their predictions of further trends have, understandably, given rise to interesting debates.
Poverty and income inequality Productivity and Innovation
growth, Inequality, endogenous growth, capital share, innovation, saving, rent
The role of corporate saving in global rebalancing
Philippe Bacchetta, Kenza Benhima 24 August 2014
Among the various explanations behind global imbalances, the role of corporate saving has received relatively little attention. This column argues that corporate saving is quantitatively relevant, and proposes a theory that is consistent with the stylised facts and useful for understanding the current phase of global rebalancing. The theory implies that, while the economic contraction originating in developed countries has pushed interest rates towards the zero lower bound, the recent growth slowdown in emerging countries could push them out of it.
The increase in global imbalances in the last decade posed a theoretical challenge for international macroeconomics. Why did some less-developed countries with a higher need for capital, like China, lend to richer countries? The inconsistency of standard open-economy dynamic models with actual global capital flows had already been stressed before (e.g. by Lucas 1990), but the sensitivity to this issue became more acute with increasing global imbalances. This stimulated the development of several alternative theoretical frameworks.
International finance International trade
interest rates, global imbalances, capital flows, saving, global crisis, credit constraints, savings glut, zero lower bound, corporate saving, global rebalancing
Is Piketty’s ‘Second Law of Capitalism’ fundamental?
Per Krusell, Tony Smith 01 June 2014
Thomas Piketty’s new book has been widely praised for its empirical contribution, but his prediction of rising inequality rests on economic theory. This column argues that Piketty’s pessimistic forecast is based on an extreme – and unrealistic – assumption about households’ saving behaviour. According to standard theory, the wealth–income ratio would increase only modestly as growth falls, so declining growth would not be a powerful force for generating high inequality.
Over the last several weeks, we have thought quite a bit about the main message in Thomas Piketty’s now world-famous book, Capital in the Twenty-First Century (Piketty 2014). We have also discussed it at great length with colleagues. In sum, at least in our departments, there has been a massive collective effort at interpreting both the material presented in the book and the background material on which the book builds. In this column we would like to present one perspective on the book that does not seem to have attracted sufficient attention in the public discussions.
Poverty and income inequality
growth, Inequality, wealth, saving, savings
Why Asian firms hold cash
Charles Yuji Horioka, Akiko Terada-Hagiwara 25 January 2014
Corporate saving has sharply increased over the last two decades, but there has been relatively little research on its determinants. This column presents recent work that estimates Asian firms’ cash flow sensitivity of cash. The impact of cash flow on the increase in firms’ cash holdings is positive and statistically significant, and larger and more highly significant for smaller firms. Since smaller firms are more likely to be financially constrained, these results suggest that Asian firms – especially smaller ones – save more when their cash flow increases in order to finance future investments
In many, if not most, economies, sharp declines in household saving rates have been offset by sharp increases in corporate saving rates for the past two decades (see, for example, Karabarbounis and Neiman 2012). Even so, relatively little research has been done on the determinants of corporate saving.
investment, Asia, saving, financial frictions, savings, corporate saving, borrowing constraints
Nudges to nudge up the savings rate
James Choi, Emily Haisley, Jennifer Kurkoski, Cade Massey 28 March 2012
As if today’s problems aren’t enough, in the coming years Europe faces what economists are calling a ‘demographic timebomb’, with ageing populations placing an unsustainable burden on already precarious public finances. In order to encourage more people to save for themselves, this column argues that using a psychological intervention can increase contributions to retirement savings accounts by up to 2.9% of income.
There is widespread concern that individuals do not save enough for retirement because they are financially illiterate (Lusardi and Mitchell 2007, Bucher-Koenen and Lusardi 2011) or suffer from self-control problems (Angeletos et al 2001). This concern has motivated policymakers and organisations to implement policies that promote higher savings. Traditionally, these policies have focused on using economic levers such as tax incentives and employer-based subsidies for saving.
Frontiers of economic research Labour markets
saving, Behavioural economics, Retirement, nudging
Welfare payments, liquidity constraints, and crime
Fritz Foley 05 August 2008
Crime rises when US welfare recipients run short of cash at the end of the month. This column discusses research that links the timing of financially-motivated crime and the timing of welfare payments. Cities that make monthly welfare payments see a clear monthly crime cycle, whereas cities that spread out the payments do not.
Consider an individual who receives support from welfare payments that occur once a month. Several recent papers indicate that this individual is likely to spend this income soon after receiving it and to face severe liquidity constraints. Dobkin and Puller (2007), Shapiro (2005), and Stephens (2003) find that recipients of government income support increase their consumption when these payments arrive and experience increasing marginal utility of consumption in between payments.
Welfare state and social Europe
US, crime, Poverty, welfare, liquidity constraints, consumption smoothing, saving