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
Inequality is bad for income growth of the poor (but not for that of the rich)
Branko Milanovic, Roy van der Weide 29 November 2014
A breakthrough in understanding the link between growth and inequality came from ‘unpacking’ inequality – looking at inequality measures for different segments of the population rather than just an aggregate measure. This column presents novel research that also ‘unpacks’ growth, investigating the impact of inequality on growth for different groups across the income distribution. Inequality toward the lower end of the distribution hinders growth for the poor, but not for the rich.
Concerns about income inequality are ethical and political as well as economic. Ethically, rising inequality – particularly that in of favour capital owners who do not labour for their income – is troubling. Politically, conflation of the rich and the powerful undermines democracy and the ‘background institutions’ that Rawls considered essential for a well-ordered liberal society.1 But for economists, it is the economic problems associated with inequality that are of first-order importance. Among those, none is more important than the effect of inequality on growth.
Poverty and income inequality
Inequality, economic growth, unpacking inequality
Labour shares, inequality, and the relative price of capital
Loukas Karabarbounis, Brent Neiman 25 November 2014
The share of compensation to labour in gross value added has declined in recent decades for most countries and industries around the world. Recent work has also used the share of compensation to labour in net value added as a proxy for inequality. This column discusses that gross and net labour shares have declined together for most countries since 1975 – an outcome consistent with the worldwide decline in the relative price of investment goods.
At least since Kaldor (1961), the constancy of the labour share of income has been considered one of the key foundations underlying macroeconomic models. In Karabarbounis and Neiman (2014a), we documented a global decline in the share of labour compensation in gross income (‘gross labour share’) since 1975 and emphasised the role of declining investment prices for this trend. Piketty (2014) and Piketty and Zucman (2014) also discussed this factor share movement and linked it to increases in the capital–output ratio.
Global economy Poverty and income inequality
capital, labour, labour share, Inequality, income inequality, wealth inequality, depreciation, interest rates
Growth, inequality, and social welfare: Cross-country evidence
David Dollar, Tatjana Kleineberg, Aart Kraay 19 November 2014
Concerns about inequality are at the forefront of many policy debates. While inequality has increased in many countries over the past few decades, in others it has decreased. This column uses data from 117 countries over the past four decades to investigate the importance of such changes in inequality, as well as of overall economic growth. Whereas inequality changes in most countries have been small, differences in overall growth performance have been large. Policymakers should therefore be careful not to undermine growth in the quest for greater equality.
Concerns about inequality are at the forefront of many policy debates today. From speeches by US President Barack Obama to the bestselling book Capital in the Twenty-First Century by Thomas Piketty, it is hard to escape the view that rising inequality poses major challenges in advanced economies. In the developing world too, much has been written about the adverse effects of high and rising inequality on the pace of poverty reduction.
Poverty and income inequality
Inequality, social welfare, economic growth
High marginal tax rates on the top 1%
Fabian Kindermann, Dirk Krueger 15 November 2014
Optimal tax rates for the rich are a perennial source of controversy. This column argues that high marginal tax rates on the top 1% of earners can make society as a whole better off. Not knowing whether they would ever make it into the top 1%, but understanding it is very unlikely, households especially at younger ages would happily accept a life that is somewhat better most of the time and significantly worse in the rare event they rise to the top 1%.
Recently, public and scientific attention has been drawn to the increasing share of labour earnings, income, and wealth accruing to the so-called ‘top 1%’. Robert B. Reich in his 2009 book Aftershock opines that: “Concentration of income and wealth at the top continues to be the crux of America’s economic predicament”. The book Capital in the Twenty-First Century by Thomas Piketty (2014) has renewed the scientific debate about the sources and consequences of the high and increasing concentration of wealth in the US and around the world.
Labour markets Poverty and income inequality Taxation
tax, tax rates, marginal tax rates, Income tax, wealth tax, Inequality
Monetary policy and long-term trends
Charles A.E. Goodhart, Philipp Erfurth 03 November 2014
There has been a long-term downward trend in labour’s share of national income, depressing both demand and inflation, and thus prompting ever more expansionary monetary policies. This column argues that, while understandable in a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance. The authors propose policies to raise the share of equity finance in housing markets; such reforms could be extended to other sectors of the economy.
There has been a long-term downward trend in the share and strength of labour in national income, which is depressing both demand and inflation. This has prompted ever more expansionary monetary policies. While understandable, indeed appropriate, within a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance (leverage).
Financial markets Macroeconomic policy Monetary policy
monetary policy, Inequality, debt, leverage, wages, labour share, globalisation, consumption, propensity to consume, fiscal policy, Ageing, interest rates, investment, asset prices, housing, house prices, exchange rates, global crisis, mortgages, sub-prime crisis, Macroprudential policy, structural reforms, balance sheets, deleveraging, equity, shared-equity mortgages, Help to Buy
Home prices since 1870: No price like home
Katharina Knoll, Moritz Schularick, Thomas Steger 01 November 2014
House price fluctuations take centre stage in recent macroeconomic debates, but little is known about their long-run evolution. This column presents new house price indices for 14 advanced economies since 1870. Real house prices display a pronounced hockey-stick pattern over the past 140 years. They stayed constant from the 19th to the mid-20th century, but rose strongly in the second half of the 20th century. Sharply increasing land prices, not construction costs, were the key driver of this trend.
For economists there is no price like home – at least not since the global financial crisis. Fluctuations in house prices, their impact on the balance sheets of consumers and banks, as well as the deleveraging pressures triggered by house price busts have been a major focus of macroeconomic research in recent years (Mian and Sufi 2014, Jordà et al. 2014, Shiller 2009).
Economic history Financial markets
housing, house prices, global crisis, land prices, transport costs, transport revolution, land-use restrictions, zoning laws, Inequality
Exploding wealth inequality in the United States
Emmanuel Saez, Gabriel Zucman 28 October 2014
Wealth inequality in the US has followed a U-shaped evolution over the last century – there was a substantial democratisation of wealth from the Great Depression to the late 1970s, followed by a sharp rise in wealth inequality. This column discusses new evidence on the concentration of wealth in the US. Growing wealth disparity is fuelled by increases in both income and saving rate inequalities between the haves and the have nots.
There is no dispute that income inequality has been on the rise in the US for the past four decades. The share of total income earned by the top 1% of families was less than 10% in the late 1970s, but now exceeds 20% as of the end of 2012 (Piketty and Saez 2003). A large portion of this increase is due to an upsurge in the labour incomes earned by senior company executives and successful entrepreneurs. But is the rise in US economic inequality purely a matter of rising labour compensation at the top, or did wealth inequality rise as well?
Poverty and income inequality
wealth inequality, wage inequality, Inequality
Offshoring and skill-biased technical change
Daron Acemoglu, Gino Gancia, Fabrizio Zilibotti 30 September 2014
Offshoring of production can have a deep impact on the wages and welfare of workers with different abilities through its effect on technological progress. This column argues that, when labour is sufficiently cheap abroad, firms have incentives to offshore low-skill tasks and invest in skill-biased technologies at home. Over time, however, offshoring raises foreign wages. This increases demand for all firms and makes innovations complementing low-skill workers more profitable. As a result, offshoring can eventually lead to higher wages for everybody and less inequality.
Offshoring, the demand for skill, and biased innovations
The rapid rise of offshoring has been one of the most visible trends in the US labour market over the last three decades. Despite its prevalence, the implications for wages and skill premia are still debated (see, for instance, Grossman and Rossi-Hansberg 2008 and Baldwin and Robert-Nicoud 2014).
International trade Labour markets Poverty and income inequality Productivity and Innovation
offshoring, skill-biased technical change, Inequality, wages, technological progress, innovation
Finance sector wages: explaining their high level and growth
Joanne Lindley, Steven McIntosh 21 September 2014
Individuals who work in the finance sector enjoy a significant wage advantage. This column considers three explanations: rent sharing, skill intensity, and task-biased technological change. The UK evidence suggests that rent sharing is the key. The rising premium could then be due to changes in regulation and the increasing complexity of financial products creating more asymmetric information.
Individuals who work in the finance sector enjoy a significant wage advantage. This wage premium has received increasing attention from researchers following the financial crisis, with focus being put onto wages at the top of the distribution in general, and finance sector wages in particular (see Bell and Van Reenen 2010, 2013 for discussion in the UK context). Policymakers have also targeted this wage premium, with the recent implementation of the Capital Requirements Directive capping bankers’ bonuses at a maximum of one year of salary from 2014.
Financial markets Microeconomic regulation
Bankers’ bonuses, banking, wages, Inequality, UK, regulation, asymmetric information, Executive compensation, Finance, task-biased technological change, ICT