And here is a fun read about the universe. Read it when you have a few minutes to go through it slowly, allowing yourself to get absorbed in the possibilities. The Fermi Paradox.
Saturday, June 28, 2014
Links on "Capital in the 21st Century"
Piketty's Capital in the 21st Century has generated many comments and thoughts. Here is a non-exhaustive list of the some of the better comments:
1. Branko Milanovic
2. Brad Delong
3. Justin Wolfers
4. Matthew Rognlie
5. Debraj Ray
6. Robert Solow
7. Larry Summers
8. Paul Krugman
9. Tyler Cowen
10. Suresh Naidu
11. Noah Smith
12. Thomas Edsall (with a good comment from Daron Acemoglu)
Sunday, June 22, 2014
Capital in the 21st Century (part II)
In my previous post, I discussed the main mechanism laid out by Piketty in his book. Here, I discuss 3 concerns I have with his theoretical model:
1. r > g is a necessary condition for inequality to rise in Piketty's model. The main strength of Piketty's work is his data analysis and here he does a commendable job trying to identify r and g over a millennium:
Piketty argues that r has been approx between 4-5% for most of history and significantly higher than g until the 20th century. He views the 20th century as en exception rather than the new rule: "r fell because of two world wars as the capital stock decreased." However, i find his justification rather uncompelling. If r was 3% during the 1950-2012 period, right after a period of incredible capital destruction, why would r be significantly higher in a long-run equilibrium?
2. The next point is that even if r is high in the long-run, K^ = r only if r is completely re-invested. However, some portion of r is consumed, especially in the form of housing, so it must be that K^ < r; how much less depends on many factors including the rich's marginal propensity to consume, donate to charity, etc.
3. In Piketty's mechanism, X = r * (K/Y) is the capital share of the economy. As (K/Y) increases and r remains relatively flat at 4-5%, X must rise. But we generally believe that there are diminishing returns to resources. Hence as (K/Y) rises, the returns to capital (r) should fall. Piketty handles this criticism by arguing that the elasticity of substitution between capital and labor will increase in the future. A high elasticity of substitution will create uses and generate returns for capital even as its relative stick continues to rise.
I am actually quite sympathetic to a high elasticity of substitution between capital and labor (which I describe in the next post) but in what way is the high elasticity of substitution a feature of capitalism? The substitution between labor and capital could happen, and in my view, could accelerate, but is not a given and hence not a feature of capitalism, which is what Piketty is aiming to describe
1. r > g is a necessary condition for inequality to rise in Piketty's model. The main strength of Piketty's work is his data analysis and here he does a commendable job trying to identify r and g over a millennium:
Piketty argues that r has been approx between 4-5% for most of history and significantly higher than g until the 20th century. He views the 20th century as en exception rather than the new rule: "r fell because of two world wars as the capital stock decreased." However, i find his justification rather uncompelling. If r was 3% during the 1950-2012 period, right after a period of incredible capital destruction, why would r be significantly higher in a long-run equilibrium?
2. The next point is that even if r is high in the long-run, K^ = r only if r is completely re-invested. However, some portion of r is consumed, especially in the form of housing, so it must be that K^ < r; how much less depends on many factors including the rich's marginal propensity to consume, donate to charity, etc.
3. In Piketty's mechanism, X = r * (K/Y) is the capital share of the economy. As (K/Y) increases and r remains relatively flat at 4-5%, X must rise. But we generally believe that there are diminishing returns to resources. Hence as (K/Y) rises, the returns to capital (r) should fall. Piketty handles this criticism by arguing that the elasticity of substitution between capital and labor will increase in the future. A high elasticity of substitution will create uses and generate returns for capital even as its relative stick continues to rise.
I am actually quite sympathetic to a high elasticity of substitution between capital and labor (which I describe in the next post) but in what way is the high elasticity of substitution a feature of capitalism? The substitution between labor and capital could happen, and in my view, could accelerate, but is not a given and hence not a feature of capitalism, which is what Piketty is aiming to describe
Capital in the 21st Century (part I)
The book of the year in economics is clearly Thomas Piketty's monograph titled, "Capital in the 21st Century." Piketty, through his empirical research, has done much to advance our understanding of inequality, and hence I was quite eager to read this book.
As expected, the empirical portion of the book did not disappoint. Wage, capital, returns to capital are very difficult to compute going back in time and Piketty performs a Herculian effort in trying to do so. The picture he paints is strong and convincing. Income and wealth inequality has been increasing in the US and other developed countries for the last several decades and is approaching levels unseen since the Belle Epoch (turn of the last century).
There are potentially many drivers of inequality over the last few decades. Explanations include technological change, globalization, the decreasing power of unions, and the superstar effect. Piketty goes above the fray and instead of looking at particular causes of inequality today, attempts to develop an overarching theory of capitalism and inequality.
Piketty's argument is as follows (^ below is used to denote annual changes in the variable):
Until the 20th century, Piketty demonstrates that the after-tax return on capital (r) has been greater than income growth (g) and he takes the 20th century to be an exception rather than a new normal. Then, if r is completely reinvested, K^ = r and K^ > g. Note that by definition, g = Y^. Hence, we get that (K/Y) is increasing over time. If (K/Y) is increasing and r is fairly constant, than it must be that X = r*(K/Y) is increasing over time, where X is the capital share of the economy. Hence, Piketty posits that the capital share of the economy will increase over time. Since, capital is concentrated in a few hands, inequality will therefore inexorably increase over time.
Since r > g is the key catalyst for inequality in his model, Pikkety argues for a global wealth tax to lower r. In my next post, I'll discuss some of my thoughts on this.
As expected, the empirical portion of the book did not disappoint. Wage, capital, returns to capital are very difficult to compute going back in time and Piketty performs a Herculian effort in trying to do so. The picture he paints is strong and convincing. Income and wealth inequality has been increasing in the US and other developed countries for the last several decades and is approaching levels unseen since the Belle Epoch (turn of the last century).
There are potentially many drivers of inequality over the last few decades. Explanations include technological change, globalization, the decreasing power of unions, and the superstar effect. Piketty goes above the fray and instead of looking at particular causes of inequality today, attempts to develop an overarching theory of capitalism and inequality.
Piketty's argument is as follows (^ below is used to denote annual changes in the variable):
Until the 20th century, Piketty demonstrates that the after-tax return on capital (r) has been greater than income growth (g) and he takes the 20th century to be an exception rather than a new normal. Then, if r is completely reinvested, K^ = r and K^ > g. Note that by definition, g = Y^. Hence, we get that (K/Y) is increasing over time. If (K/Y) is increasing and r is fairly constant, than it must be that X = r*(K/Y) is increasing over time, where X is the capital share of the economy. Hence, Piketty posits that the capital share of the economy will increase over time. Since, capital is concentrated in a few hands, inequality will therefore inexorably increase over time.
Since r > g is the key catalyst for inequality in his model, Pikkety argues for a global wealth tax to lower r. In my next post, I'll discuss some of my thoughts on this.
Tuesday, June 17, 2014
Rand Paul speaks about the injustices of the drug war
The first 2 minutes of this recent speech by Rand Paul are excellent. I am happy that Rand Paul is running for president if only for the reason that he is raising awareness of the injustices in our criminal justice system.
His main points:
1) Black teens gets jailed at 3-4 times the rate as white teens despite similar drug use rates
2) The jail sentences are way too extreme for youthful, victim-less mistakes and are tearing apart families
3) Felons' voting rights should be restored after they have paid the price for their crimes
I could not agree more. I think Barack Obama probably agrees on all three accounts. But, ironically, Rand Paul has a better chance of moving the needle in terms of public opinion, and even perhaps legislation than Obama on this issue. I hope Paul continues to make these issues front and center of his campaign and fights for this whether he wins or loses his campaign for presidency. (Disclaimer, I am not supporting of Rand Paul for President. But glad he is running since he is the only person I have seen bring up these issues, which are vitally important).
Tiered justice system
In December 2012 HSBC
admitted to laundering money for Mexican and Colombia drug cartels. The bank
was fined $1.9 billion (5 days of revenues) and not a single person went to
jail. On the other side of the drug trade, you have the story of Anthony Smelley:
Early on a morning in January 2009, Smelley, who is 22,
was pulled over while driving along I-70 in Putnam County, Indiana. Months
earlier, he'd been in a car accident and won a $50,000 settlement. He states in
court documents that he had taken around $17,500 with him that January day en
route from his home in Detroit to St. Louis, to buy a new car for his aunt.
Smelley was pulled over for making an unsafe lane change and driving with an obscured license plate. He was also driving with an expired driver's license. His traffic stop should have ended with citations for those infractions. Instead, the police officer asked Smelley to get out of the car and patted him down, finding the cash. The officer then called in a K-9 unit for a sniff search of Smelley's car for drugs. The dog alerted twice. Smelley and two passengers were arrested, and the police seized Smelley's money.
A subsequent hand search of Smelley's car turned up no illicit drugs, and no criminal charges were ever filed against Smelley or his passengers. Smelley produced a letter from a Detroit law firm confirming he had been awarded the $50,000 from the accident. That didn't matter. Putnam County has since held Smelley's money for more than a year. The prosecuting attorney said, “We can seize money if we can show that it was intended for use in a drug transaction at a later date…”
Smelley was pulled over for making an unsafe lane change and driving with an obscured license plate. He was also driving with an expired driver's license. His traffic stop should have ended with citations for those infractions. Instead, the police officer asked Smelley to get out of the car and patted him down, finding the cash. The officer then called in a K-9 unit for a sniff search of Smelley's car for drugs. The dog alerted twice. Smelley and two passengers were arrested, and the police seized Smelley's money.
A subsequent hand search of Smelley's car turned up no illicit drugs, and no criminal charges were ever filed against Smelley or his passengers. Smelley produced a letter from a Detroit law firm confirming he had been awarded the $50,000 from the accident. That didn't matter. Putnam County has since held Smelley's money for more than a year. The prosecuting attorney said, “We can seize money if we can show that it was intended for use in a drug transaction at a later date…”
So if
bankers launder money for drug cartels, shareholders pay a fine but not a
single banker is prosecuted for jail time or pays any fees. Meanwhile,
Smelley’s money can be confiscated because there is a chance he may buy drugs
in the future? For a long time I used to think the inequalities in the American
legal system were noise in an otherwise beautiful system. But the more you
read, the more you realize that we have three legal systems. The one for the
middle of the country operates reasonably well and is the envy of the world.
There is a second one for the rich and white collar criminals. And there is a
third for the poor and blue-collar criminals.
Here is another example of how the criminal justice system works if you're poor via stop and frisk in Miami Gardens, FL:
Earl Sampson has worked for nearly three years at the 207th Street Quickstop, a convenience store that has become the epicenter for police stops. Earl, 28, says he’s been stopped more than 200 times by the Miami Gardens Police Department (MGPD). According to records obtained by Fusion, MGPD stopped him and filed a field contact report 181 times. In addition, Earl was arrested 111 times. Seventy-one of those arrests were for trespassing at his place of work. "They walked through the door, grabbed me and just take me out,” says Sampson. "I told them I work here and they said I don’t care.” Quickstop owner Alex Saleh says he was so appalled that he installed video surveillance cameras in his store - not to record crime but to record police misconduct. In January 2012, Alex says he gave his employee, Earl Sampson, a place to live inside the store to protect him from the police. But even that was no deterrent..police are seen storming into Earl’s bedroom in the back of the store.
Matt Taibbi contrasts the top and bottom tiers of our judicial/legal system in greater detail in his book American Injustice in the Age of the Wealth Gap and I highly recommend reading his book. Learning about our vastly different tiers of our justice system is heartbreaking and infuriating. And as economic inequality rises, the tiered nature of justice in America could increasingly define us.
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