Noted for Lunchtime on June 18, 2014
Afternoon Must-Read: Matthew Yglesias: This Disruptive Think Piece Will Change the World

The Daily Piketty: Ryan Avent on Housing in the Twenty-First Century: Wednesday Focus for June 18, 2014

The very keen-witted Ryan Avent:

Ryan Avent: Thomas Piketty's "Capital": Housing in the twenty-first century: "What occasionally strikes me as odd... the tendency for criticisms of the book to reach inexorably for the conclusion that "Piketty is wrong", whether or not that is the most obvious upshot of the particular critique. He surely is about some things. On others he isn't, on others we are unable to say for now, and on others he is useful whether or not the details turn out to be right...

Indeed. I am wondering whether I should write a piece about Piketty Derangement Syndrome...

What is Piketty Derangement Syndrome? Consider the usually-reliable James Pethokoukis's odd:

James Pethokoukis: The New Marxism: "Karl Marx wasn’t wrong, just early. Pretty much. Sorry, capitalism. #inequalityforevah"

Consider the embarrassing claim by Pers Krusell and Anthony Smith that they:

do not quite recognize [Piketty's] second law, k/y = s/g. Did we miss something important, even fundamental, that has been right in front of us all along?

when they know as well as I do that k/y = s/g is at the heart of both of the two articles that Robert Solow places at the start of modern economic growth theory: Harrod (1939) and Domar (1946).

It is odd: from my perspective, most of the critiques largely miss the boat. The things that make the grimmer aspects of Piketty's forecast what I regard as a 50-50 shot even if plutocrats lock down politics for a century are:

  1. The Rognlie-Summers possibility that even with the forthcoming rise of the robots capital will turn out to complement rather than substitute for labor.
  2. The possibility that instability may make keeping fortunes growing a lot harder than Piketty.
  3. The possibility that our plutocrats as a social class will play the status game of spend-your-money-to-change-the-world.

But nearly all the critiques I have seen touch on those vulnerabilities and open questions only tangentially...

More smart things from Ryan Avent on Piketty, housing, and the sweep of the argument:

Ryan Avent: Thomas Piketty's "Capital": Housing in the twenty-first century: "OVER the last few days a couple of interesting critiques... by Matt Rognlie and Justin Wolfers.... The question I have raised is whether the importance of housing to Mr Piketty's story is a strength or, as some critics suggest, a weakness, possibly fatal.... I have two broad thoughts about this critique. One is that it misses the forest for the trees. That is, a story in which Palo Alto millionaires use their political influence to protect the value of a major capital investment, with generally negative distributional consequences, is not exactly antithetical to the general argument made in "Capital".... The rent-seeking rich capturing a larger share of national income seems pretty compatible to me with Mr Piketty's overall argument....

The second is that the economics of the housing story are more complicated than the critique lets on.... Skilled cities have not allowed housing supply to expand to meet rising demand. Housing has therefore been rationed by price, pushing less productive workers toward cities where housing supply growth is higher and housing cost growth is lower. As a result, fewer people live in the most productive places, and quite a lot of the gain from employment in productive places is captured by landowners... lower overall productivity, more income inequality, and more income flowing to capital rather than labour.... Artificial housing scarcity greatly exacerbates the problem, but it is not the origin of the problem and eliminating it does not eliminate the problem. The problem is the return of land as a critical input to production....

I think a fair read of the book actually identifies four mechanisms... the continued rebound in wealth from the interwar euthanasia of the rentiers and postwar suppression of inequality... increased substitutability of capital for labour... a return on invested capital that is generally higher than income growth... the return of land. These trends are unfolding in tandem and often reinforce each other....

As I have mentioned on Twitter, I think economists want to read the book, and particularly its analytical framework, much more narrowly than is appropriate.... But the book is a sweeping narrative.... There is a reason he didn't just scratch out a few equations.... I understand some economists may interpret that choice as an attempt to dodge academia's demands for a particular level of rigor. I've always seen it as simply a way to tell a big story effectively, using a number of different approaches.