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Från The Economist 4/6 2014

Phil Magness om 5 återstående problem i kontroversen med FT 16/6

IN THE latest wave of criticism of

Mr Piketty, a French economist, defines his second fundamental law of capitalism as β = s/g, where β is the ratio of national capital to national income, s indicates the savings rate net of depreciation and g denotes the growth rate of the economy. For example, if the savings rate is 6% and the economy grows by 2% every year, the country is predicted to, in the long run, accumulate a stock of wealth which approaches 300% of GDP.

Employing his law, Mr Piketty predicts that the future world capital/income ratio will increase and approach 600% in less than fifty years. Since capital tends to be unequally distributed, this implies higher inequality. This forecast is based on two assumptions: that global growth will fall from 3% per year today to 1.5% in the second half of the century and that the global savings rate will stabilise at 10%. The second assumption is what troubles Messrs Krusell and Smith. While they do not dispute the risk of falling growth, they take issue with the notion that the future savings rate will be constant at around 10%. They write:

Ironically, however, Messrs Krusell and Smith make some strange assumptions of their own. As has been pointed out, their choice of a depreciation rate equal to 0.1 is unrealistically high. It is also unclear why they focus so much attention on a scenario with zero economic growth; it may be an interesting theoretical exercise, but in terms of forecasting future inequality it is doubtful whether anybody really believes that the global economic growth on average will be zero over the next hundred or so years.

A third point of criticism of Messrs Krusell and Smith's analysis is the lack of cross-country data over time. The authors admit that it is beyond the scope of their note to examine the hypothesis of a positive relationship between savings rates and growth rates is correct. Nevertheless, even if it would be demonstrated that no such relationship exists, Mr Piketty still has to do a better job explaining why he thinks it is plausible that the global net savings rate will stabilise at about 10%. In many of the world’s largest economies, the trend over the past decades has been falling net savings rates. If history is to prove him correct, this trend will have to be reversed or else be compensated by higher savings rates in today’s smaller economies. A theory of how either or both of these will happen and why that is plausible is in order.

The latest critique against the French economist’s magnum opus notwithstanding, inequality may still rise rapidly in the future. But rather than by the quotient of the net savings rate over the growth rate, future inequality could be driven by an increasingly unequal distribution of income. Both demographic shifts and technological progress, for example, could favour the well-educated over the less-skilled, causing a much greater concentration of economic resources. Mr Piketty may therefore turn out to be right in predicting increasing economic inequality, but it does not have to be because of the implications of his second fundamental law of capitalism.

/SH**Thomas Piketty**’s wonky blockbuster, “Capital in the Twenty-First Century”, Per Krusell at Stockholm University and Tony Smith at Yale University argue that the book’s prediction of rapidly rising inequality is based on extreme and implausible assumptions. In a note, Messrs Krusell and Smith claim that Mr Piketty’s proposed second “fundamental law of capitalism” is supported neither by widely-accepted macroeconomic theory nor by empirical evidence.Mr Piketty, a French economist, defines his second fundamental law of capitalism as β = s/g, where β is the ratio of national capital to national income, s indicates the savings rate net of depreciation and g denotes the growth rate of the economy. For example, if the savings rate is 6% and the economy grows by 2% every year, the country is predicted to, in the long run, accumulate a stock of wealth which approaches 300% of GDP.

Employing his law, Mr Piketty predicts that the future world capital/income ratio will increase and approach 600% in less than fifty years. Since capital tends to be unequally distributed, this implies higher inequality. This forecast is based on two assumptions: that global growth will fall from 3% per year today to 1.5% in the second half of the century and that the global savings rate will stabilise at 10%. The second assumption is what troubles Messrs Krusell and Smith. While they do not dispute the risk of falling growth, they take issue with the notion that the future savings rate will be constant at around 10%. They write:

There are no errors in the formula Piketty uses, and it is actually consistent with the very earliest formulations of the neoclassical growth model, but it is not consistent with the textbook model as it is generally understood by macroeconomists...We look more closely at...Piketty’s assumption of a constant (positive) net saving rate from two perspectives: the textbook model with an exogenous gross saving rate and a model in which the saving rate is chosen optimally. In both settings the net savings rate can be derived as an explicit function of g: as g changes, so ought the net saving rate.Using post-war data from the United States, Messrs Krusell and Smith plot the net savings rate over time and show that it has fallen gradually toward zero. In addition, as they predict, the authors find a positive relationship between decadal averages of savings rates and growth rates. They conclude that the belief that the net savings rate “will remain constant and positive in the twenty-first century does not appear like a good assumption at all”.

Ironically, however, Messrs Krusell and Smith make some strange assumptions of their own. As has been pointed out, their choice of a depreciation rate equal to 0.1 is unrealistically high. It is also unclear why they focus so much attention on a scenario with zero economic growth; it may be an interesting theoretical exercise, but in terms of forecasting future inequality it is doubtful whether anybody really believes that the global economic growth on average will be zero over the next hundred or so years.

A third point of criticism of Messrs Krusell and Smith's analysis is the lack of cross-country data over time. The authors admit that it is beyond the scope of their note to examine the hypothesis of a positive relationship between savings rates and growth rates is correct. Nevertheless, even if it would be demonstrated that no such relationship exists, Mr Piketty still has to do a better job explaining why he thinks it is plausible that the global net savings rate will stabilise at about 10%. In many of the world’s largest economies, the trend over the past decades has been falling net savings rates. If history is to prove him correct, this trend will have to be reversed or else be compensated by higher savings rates in today’s smaller economies. A theory of how either or both of these will happen and why that is plausible is in order.

The latest critique against the French economist’s magnum opus notwithstanding, inequality may still rise rapidly in the future. But rather than by the quotient of the net savings rate over the growth rate, future inequality could be driven by an increasingly unequal distribution of income. Both demographic shifts and technological progress, for example, could favour the well-educated over the less-skilled, causing a much greater concentration of economic resources. Mr Piketty may therefore turn out to be right in predicting increasing economic inequality, but it does not have to be because of the implications of his second fundamental law of capitalism.

Phil Magness om 5 återstående problem i kontroversen med FT 16/6