Again, I have not read the book (it will be released in about 6 weeks). Does he come out in favor of privatizing Social Security? If not, then why not?
According to Arpit Gupta, Piketty understands how his analysis helps make a case for privatizing Social Security, but he says
one must bear in mind that the return on capital is in practice extremely volatile. It would be quite risky to invest all retirement contributions in global financial markets. The fact that r > g on average does not mean that it is true for each individual investment. For a person of sufficient means who can wait ten or twenty years before taking her profits, the return on capital is indeed quite attractive. But when it comes to paying for the basic necessities of an entire generation, it would be quite irrational to bet everything on a roll of the dice. The primary justification of the PAYGO system is that it is the best way to guarantee that pension benefits will be paid in a reliable and predictable manner: the rate of wage growth may be less than the rate of return on capital, but the former is 5-10 times less volatile than the latter.
What’s that, Dr. Piketty? There’s risk, you say? Capital income is 5-10 times more volatile than labor income? It is “quite irrational to bet” on capital unless you are “a person of sufficient means”? And these factors only matter in the context of Social Security privatization, but can be ignored in the main part of your book?
Not sure how this matters for his overarching argument. He’s just saying that, on average, the higher return to capital will cause inequality to rise, and that remains true even if the returns vary. If anything this variance adds to his argument as it means many capitalists are getting even more than 5%.
I’m also not sure what you’re getting at with the “person of sufficient means” point. Are you leaning on Tyler Cowen’s argument that inequality is necessary to spur investment, or am I misreading you?
As you stated before….He notes the higher returns from capital investment vice labor income without acknowledging the risk that capital investment must take on. Didn’t Fama’s work illuminate this subject a bit?
What, did Eugene Fama’s nobel prize this year not go noticed in Paris?
He does deal with risk. What do you think those World Wars and Depression were about? Progressive taxation, inflation, and financial repression?
The risk I’m referring to is the risk associated with the investment of capital in ANY market. You don’t need any of what you mentioned to still have high levels.
As has been stated elsewhere, he specifically does not account for investment risk when discussing the relative returns to capital and labor.
Best line? Possibly. So if most or all of the excess returns are rewards for risk taking where does that leave the rentiers argument?
If capital is 5-10 times more volatile then that implies a time horizon and various avenues of diversification that can be accomplished by pooling resources.
I look at the world and see vast inequality based on location. This tells me that capital is much more than your bank account. The poorest job holder in a developed country has much at their disposal. I’m not sure it is 99% of GDP because capital and labor have to interact. So, maybe like Yogi Berra said, 100% of GDP is all labor. Maybe what matters is supply and demand. What happens when capital achieves excess supply?
I’m not sure how much I agree with Piketty, but there’s a pretty simple way to reconcile the two stances. “There will always be a winner” and “everyone always wins” are two very different statements. I bet that Piketty would be quite happy with the statement ‘society will be controlled by those lucky enough to win the winners of the capital gamble.’
Piketty is right about the risk to capital being too great to allow Soc Sec to be privatized. In fact, that variance and volatility would guarantee that a significant minority of people with arrive at age 65 as paupers. I’m a 1%’er who doesn’t want to have to look at people sifting thru garbage.
The interesting thing about that risk and volatility is that it guarantees the rise of great fortunes. We all know we can’t get our nice average “r” every year – that there will be ups and downs. But on top of that, some people will make multiples of “r” and get fabulously wealthy and others will lose money and be poorer than their parents. That’s just a statement of fact – not prescribing anything.
You need to think about why volatility leads to “risk”? Answer – diminishing marginal utility of wealth. Volatility is bad because you value what you might lose more than what you might gain. Now think how “risk” varies between someone who’s left hand distribution from a diversified portfolio includes penury and someone who’s left hand distribution doesn’t drop below 1bn. I would argue that it is a “bit rich” (pun intended) to regard the return to the latter’s investment as compensation for risk. After all, if risk depends on diminishing marginal utility it has to either disappear or equal zero at some level of wealth.
Interesting though to think that enough concentration of wealth and the return for risk should fall to reflect dominance of the extremely wealthy in asset markets – holding competition I these markets constant that is – which after all is the main concern with rule by oligarchs.
Risk is crucial to thinking about wealth distribution. The riskfree rate of return is low— say, 2%, lower than the growth rate of the economy. Piketty’s 5% rate is, I suppose, an average over all risk levels.
Thus, cautious rentiers will not end up getting most of national income even if they save 100% of what they earn.
On the other hand, if you’re willing to take more risk– which richer people (though maybe not rentier rich people) generally are— you get a higher expected return. What is the implication of that?
I think the implication is that wealth concentration will in most years increase, perhaps to quite drastic levels, but over a very long period of time, perhaps 100 years, it will stay unchanged. Think of Gambler’s Ruin. If someone makes risky bets that are all fair gambles, in the long run he loses everything with 100% probability. I think that even is true if his risky bets are more than fair, adn have a positive expected return. The reason is that eventually you get 1000 unlucky bets in a row and run out of money, and that is what in stochastic processes they call “an absorbing state”. In the wealth context, the risktaking saver gets richer and richer till one or a sequence of Very Bad Events wipes him out— a Great Depression or a Russian Revolution.
Bottom line: you can’t analyze wealth concentration over the long run without paying serious attention to risk.