Conference Draft Papers from Brookings Panel on Economic Activity: Spring 2014
Philippe Martin and Thomas Philippon: Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone

Afternoon Must-Read: Paul Krugman: Notes on Piketty's "Capital in the Twenty-First Century"

Paul Krugman: Notes on Piketty: "Piketty’s big idea is that we are in the early stages of returning to a society dominated by great dynastic fortunes, by inherited wealth.

And he has an analytic argument to back up that idea.... Imagine a wealthy family that has managed, somehow or other, to guarantee that a large fraction of its income is used to accumulate more wealth. Can this family thereby acquire a dominant position in society? The answer depends on the relationship between (the risk) r, the (risky) rate of return on assets, and g, the overall rate of economic growth. If r is less than g, dynasties are doomed to erode.... So what determines r-g? Piketty stresses the effects of changes in economic growth.... Piketty tells us something remarkable: historically, r has almost always exceeded g--but there was an exceptional period in the 20th century, a period of rapid labor force growth and technological progress, when r was less than g. And he asserts that the kind of society we consider normal, in which high incomes reflect personal achievement rather than inherited wealth, is in fact an aberration driven by this exceptional period. It’s a remarkable, sweeping vision. A couple of questions: 1. How much of the decline in r relative to g in the 20th century reflected fast growth, and how much reflected policies? 2. How relevant is this story to what has happened so far? In the United States, as Piketty himself stresses, soaring inequality has to date been largely been driven by labor income – by 'supermanagers'

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