5 thoughts on “Why is Piketty so certain about things which are probably completely wrong?”

  1. Posted 10/07/2014 at 12:34 | Permalink

    “Why would a poor individual wish to borrow if his income is not expected to increase?” That is not actually what either Sumner or Piketty say.

    Here is Piketty:

    “one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States”.

    And here is Sumner:

    “Why would stable real wages lead to more debt? More specifically, why would it “inevitably” lead to more debt? If my wages were stagnant I certainly wouldn’t react by taking on more debt, rather I’d borrow more if I expected my income to rise. Is there a theory here?”

    They are not talking about the same thing. Sumner is talking about individual expectation of future income rises. Piketty is talking about what actually happened to low and middle incomes in aggregate.

    In my takedown of Sumner I discussed the expectations problem:

    “Why would people borrow when they don’t expect their incomes to rise? This is indeed a good question. But it is not what Piketty actually says. He notes that the purchasing power of low-to-middle income people stagnated. But he says nothing about their expectations. People expect their incomes to rise over the course of their working life. This expectation is near-universal and has nothing to do with short-term economic conditions. Even when average incomes are falling, individuals still generally expect their incomes to rise over the medium term.”

    (full post is here – it is not the same as the one you have linked to: http://coppolacomment.blogspot.co.uk/2014/07/sumner-on-piketty.html)

    So it is entirely possible, and indeed likely, that people might borrow in anticipation of FUTURE income rises when their current incomes are actually stagnating.

    Regarding the sectoral balances approach. The US trade deficit is pretty intractable, largely because the two major surplus countries – China and Germany – do not have currencies that float with respect to the USD. Germany uses the Euro, which does float, but the Euro is persistently undervalued relative to fundamentals in Germany because of the presence of weaker countries in the union. If the currency cannot adjust, then neither the trade deficit nor the capital surplus can correct unless unit labour costs fall, which means very significant falls in wages and employment costs. I’m very happy to discuss the microeconomic factors that support this situation, and indeed I am planning to do so in another post, following extensive twitter discussions about this with a variety of people. But that is the macroeconomic context. Your statement that it is “not economics” suggests you have a rather narrow view of what constitutes “economics”.

  2. Posted 10/07/2014 at 13:57 | Permalink

    thank you for your comment, Frances. On the contrary, I have a very, very wide view of what constitutes economics, but I think one has to go back to human behaviour in the economic sphere rather than assume that something just happens to be fixed and given; and it is very clear that I was saying that the view that sector imbalances just “exist” is not economics. You have elaborated now and thus we are back in the sphere of economics! So let’s move on from what might be regarded as petty point scoring (started by me).

    On the issue of borrowing and future expectations etc.,…those who run the inequality/incomes stagnation line (which is disputed I should add, but if one disputes it then one disputes the inequality figures too) then the argument goes that real incomes among the least well off have stagnated in the US since 1970. This is not short term and should be a long enough period of affect expectations. But, in any case, if those expectations of increased incomes were validly held then the borrowing would be rational (which you would accept). If they were validly held and subsequently validated then a lot of people would probably stop worrying about the poverty issue.

    Regarding the sector balances, then effectively the argument seems to have moved on to one that is often used by central bankers and others that the financial crash was really caused by this problem and not by inequality. However, whilst it may be true that many of the factors you point to (e.g. currency values) are fixed or managed, others are not. China will not be able to supress inflation forever if its currency is under-valued. As you say, Germany is part of the euro and there will be internal inflation in Germany if its economy is out of equilibrium with the others in the euro zone. If there are positive balances in the US private, corporate and government sectors then the dollar can float down easily enough. However, the fact is that, taking the government, corporate and household sectors together the US economy has generally been a net dis-saver. Such a country will import capital and its exchange rate will rise. Roughly speaking, both the government and household sectors were net borrowers to the tune of 2.5 per cent of GDP. Unsurprisingly, the US trade deficit was 5 per cent of GDP. China and Germany both had the opposite situation. If the US private sector had been in surplus, everything else would not have remained the same. I struggle to understand how a robust theory can have the balance of payments deficit driven only by trade with net savings somehow being a residual and not affecting the exchange-rate setting (or in a fixed exchange rate model) monetary and inflation process. It just assumes away a whole lot of important economic variables (which is why I used the tendentious phrase “not economics”)

  3. Posted 10/07/2014 at 15:47 | Permalink


    As is illustrated in the above link, Riccardo’s Law of Rent predicts that as GDP rises, the return to wages and interest fall, and the return to rent rises.

    No need for any convoluted Neo-Classical economic explanations. Neo-Classical Economics was formulated precisely to obscure people from see the very simplest economic truths. Job done I’d say.

  4. Posted 10/07/2014 at 16:12 | Permalink

    Borrowing in expectation of future income rises is clearly rational. The question is whether, given the (claimed) stagnation of incomes since 1970, that expectation is or was rational. I would argue that it is. Even if incomes in aggregate are stagnating, individual incomes for prime-age workers tend to rise as they gain skills and experience:this is balanced by individual incomes tending to fall over the age of 50 and by women dropping down to lower income levels when they have children. The tendency of economists to speak of “households”, ignoring their composition, masks this last effect in particular.The problem, of course, is that for many people their rational expectations (or if you prefer, hopes and dreams) of better jobs and higher incomes have been dashed by the reality of techological change, offshoring, and since the crisis recession, stagnation and unemployment. So actually I didn’t disagree with Scott’s observation that borrowing would be done in anticipation of higher income. I disagreed with his (and your) reading of Piketty.
    Regarding the sectoral balances, I accept your point about low savings in the US. I would add that Americans in general (not just those on low incomes) were encouraged to borrow against property for consumption by President Bush after 9/11: had this not resulted in a consumption boom, the US government’s borrowing would have been far higher (I think I said this in the post), not least because of the Afghanistan and Iraq wars. We could say that the tax revenue generated from the consumption boom went to finance the war on terror.
    You criticise me for treating net saving as a residual. I didn’t, actually, but I perhaps did not give it as much weight as you would like. But equally, you can’t posit a balance of trade theory driven entirely by net saving while ignoring the effects of outright financial repression in both China and Germany, either. If the US increased its net saving under these circumstances the trade deficit and capital surplus would indeed fall, but that wouldn’t necessarily result in an increase in US exports. It might simply mean a reduction in everyone’s trade – and trade DOES matter. It is global trade above all that pulls people out of poverty. I don’t wish to see it reduce.

  5. Posted 10/07/2014 at 16:35 | Permalink

    thank you, Frances, very sensible thoughts

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