How Do the Returns to Capital Actually Function?

I want to turn your attention to an interesting post at The Economist’s blog. It seems that an MIT grad student (and blogger!) has mounted a very credible counter-argument to Thomas Piketty’s thesis on capital and wealth, expressed in Dr. Piketty’s best-selling book, Capital in the Twenty-First Century, that captured so much attention last year. Here’s the substance of the post:

In his book, Mr Piketty argues that over the long run the rate on return of wealth exceeds economic growth: a dynamic summed up in the equation r>g. Over time, this relationship increases inequality as the share of national income going to those who own capital (the rich) rises, while the portion going to labour (everyone else) falls. He also argues that the return on capital in recent history has been remarkably stable, even as economic growth has fallen, and that this trend will continue in the future.

Mr Rognlie mounts three main criticisms of these arguments. First, he argues that the rate of return from capital probably declines over the long run, rather than remaining high as Mr Piketty suggests, due to the law of diminishing marginal returns. Modern forms of capital, such as software, depreciate faster in value than equipment did in the past: a giant metal press might have a working life of decades while a new piece of database-management software will be obsolete in a few years at most. This means that although gross returns from wealth may well be rising, they may not necessarily be growing in net terms, since a large share of the gains that flow to owners of capital must be reinvested.

Second, Mr Rognlie’s research suggests that Mr Piketty has overestimated how high the returns on wealth are likely to be in the future. These should also decline over time, he reckons, unless it is very easy for the economy to substitute capital (like robots) for workers. Yet the historical evidence suggests that this is far harder than he suggests.

And third, Mr Rognlie finds that the growing share of national income deriving from capital income has not been distributed equally across all sectors. The return on non-housing wealth, in fact, has been remarkably stable since 1970 (see chart). Instead, surging house prices are almost entirely responsible for growing returns on capital.

There’s more at the linked post.

If you’re the sort of person who skips to the end of a mystery story to find out whodunnit, in Mr. Rognlie’s view the culprit is homeowners rather than “top-hatted capitalists or famous hedge-fund managers” who are responsible for the phenomena Dr. Piketty has pointed out. Which is another way of saying how terrible our policies have been over the period of the last 60 or 70 years but that’s a subject for another post.


Cui Bono?

Fellow St. Louisan Yogi Berra is reputed to have said that in theory there is not difference between theory and practice but in practice there is. When George Will lauds the virtues of concentrated wealth and monopolies:

Every day the Chinese go to work, Americans get a raise: Chinese workers, many earning each day about what Americans spend on a Starbucks latte, produce apparel, appliances and other stuff cheaply, thereby enlarging Americans’ disposable income. Americans similarly get a raise when they shop at the stores that made Sam Walton a billionaire.


Monopoly profits are social blessings when they “signal to the ambitious the wealth they can earn by entering previously unknown markets.” So “when the wealth gap widens, the lifestyle gap shrinks .” Hence, “income inequality in a capitalist system is truly beautiful” because “it provides the incentive for creative people to gamble on new ideas, and it turns luxuries into common goods.” Since 2000, the price of a 50-inch plasma TV has fallen from $20,000 to $550.

I think there’s something he needs to explain. If, as he claims, leaving wealth in the hands of the wealthy:

The best way to (in Barack Obama’s 2008 words to Joe the Plumber) “spread the wealth around,” is, Tamny argues, “to leave it in the hands of the wealthy.” Personal consumption absorbs a small portion of their money and the remainder is not idle. It is invested by them, using the skill that earned it. Will it be more beneficially employed by the political class of a confiscatory government?

results in more business investment and greater prosperity in the United States, how is it even as the income of the wealthiest has skyrocketed real domestic business investment has lagged?

Over the last thirty years we have imported inexpensive goods from China and exported jobs. While there is some benefit to the average Joe in the cheap manufactured goods coming into the United States, most of the benefit is going to the wealthiest.

There is a balance to be sought. We aren’t realizing it right now and the reason we aren’t is that, rather than purchasing U. S. goods and services with the dollars they obtain through trade, the Chinese are buying Treasury bonds. That does very little for the average American but lots for politicians, Goldman-Sachs, Warren Buffett, and the people the federal government actually spends money on (healthcare providers and wealthy elders).


Spending More Money on Medicare Is Easy

Although the editors of the Washington Post are right to take note of the incipient agreement on abolishing the always-ignored Sustainable Growth Rate in Congress—that’s the provision that induces the annual exercise in cowardice, the “doc fix”:

THE HOUSE of Representatives is on course to pass a major piece of Medicare legislation with strong support from the leadership and rank and file of both parties. Yes, you read that right: On Thursday, the House is scheduled to vote on a package that permanently eliminates the expensive annual budgetary charade known as the “doc fix,” while enacting tens of billions of dollars worth of structural reforms to the massive program for seniors — and providing a two-year, $5.6 billion dollop of funding to an important children’s health-care program to boot. For their labors in moving this bill to the brink of passage, we’d pat House Speaker John A. Boehner (R-Ohio) and Democratic leader Nancy Pelosi (Calif.) on the back — if they weren’t already doing so themselves.

I don’t think they appreciate how weak a victory it is. They try to rationalize the move as the beginning of a process:

Arguably, ending the doc fix helps pave the way for more reforms because of all the legislative time and attention that will no longer be wasted on that exercise.

That’s nonsense. The House has merely agreed to say out loud what has been left unsaid for the last 15 years: spending more money on Medicare is easy. It will always be ready to spend more money on Medicare.

Despite the rejoicing over the slower rate of growth, Medicare spending continues to grow at a multiple of the non-healthcare rate of inflation, GDP, and incomes. As a matter of basic math that can’t continue indefinitely and I would submit that failing to address the basic, structural problems in our healthcare policy is already having an adverse effect on economic growth and jobs.

Effective reform, reform worthy of the name, will necessarily involve making hard decisions rather than easy ones. What the House has passed is just more of what we’ve been doing for the last half century.


Watcher’s Council Nominations

The members of the Watcher’s Council have nominated the following for consideration by the Council:

The Right PlanetTwo Police Officers Shot in Ferguson … Happy Now Eric Holder and Barack Obama?

Brent’s take on the shooting of two police officers in Ferguson a couple of weeks ago. I find his diction a bit excessive but I agree that President Obama and AG Holder’s involving themselves in the goings-on in Ferguson kept the ball up in the air longer than it otherwise might have been.

Joshuapundit-The Israeli Elections – More Than A Referendum On Netanyahu

I agree with Joshuapundit to the extent that President Obama’s putting in his two cents about the Israeli election lead to inevitable claims that one of the issues in the election was a referendum on Obama. What role that played in the results I couldn’t say.

The Noisy RoomObama and Kerry Seek to Finalize an Iranian Nuclear Deal as Nuclear Conflict Draws Near

I found Terresa’s concerns about nuclear war somewhat overblown. I’d be willing to bet a shiny new dime that there won’t be a nuclear war in the next five years. Also, if there really is a danger of nuclear war, why aren’t we trying to repair our relationship with Russia? If there’s a nuclear exchange, the greatest likelihood remains that it will be between Russia and the U. S. and we’ve been going out of our way to alienate the Russians.

Don SurberFrancis and Elizabeth Lewis. They sacrificed their lives and fortune for your liberty.

Don contributres a vignette from early American history about which I’d known nothing prior to reading his post. I appreciate the history lesson. Recommended reading.

GrEaT sAtAn”S gIrLfRiEnD“Death To America”

Sadly, “Death to America” has become a formula in Iranian political speeches analogous to the “God Bless America” used in American political speeches. I don’t think they like us much but I don’t know how seriously I take it, either.

The RazorShoutdown

Scott critiques the Obama Administration’s foreign policy.

The Independent SentinelObama’s Plan to Destroy Netanyahu

The question I’d have about the changes in long-standing U. S. policy that the Obama Administration has been making is whether we’re actually benefiting from them. It’s really not clear to me. Ideas that sound great in the faculty lounge and are harmless as long as they stay there may not be as benign coming from the White House.

VA Right! - Va State Senate Candidate Vince Haley Proposes Elimination of State Income Tax

I always appreciate Tom’s commentary about the Virginia Republican Party about which I would otherwise know nothing. I’m as skeptical as he is about the prospects for the state abolishing its income tax as was proposed by a candidate running for the state senate.

The Glittering Eye -What Law Did Hillary Break?

Nice Deb WH: Bibi’s “Words Matter” But Ayatollah Khamenei’s “Death to America” is Acceptable Political Rhetoric

The “Death to America” stuff must really get under my fellow Watchers’ skin.

Rhymes With RightOn The Ted Cruz Presidential Announcement

Greg comments on Sen. Ted Cruz’s throwing his hat into the ring and why he doesn’t support him for president.

Bookworm RoomWhen it comes to campus fascism, revolutions always eat their own

I’m surprised that Bookworm doesn’t realize that Fabian socialism won its “revolution” in the United States a half century ago. President Obama didn’t do nearly as much to move us in that direction as Richard Nixon.

Ask MarionTed Cruz to be first to announce 2016 bid

Marion remarks on Ted Cruz’s announcement.

Well, I’ve decided which posts I’ll vote for. Would any of the posts receive your vote?

The announcement at the Watcher’s site is here.

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Bad Security Assumptions

Today I went to my bank in person to ask a question and complained. I had received a telephone call last week from someone purporting to be a representative of the bank who asked several questions that were inappropriate for an unsecured telephone line and I complained about it at the time. I went to the bank to see if the call had been legit. As it turned out it was but there was no way for me to determine that other than to verify it independently. They did have a record of my previous complaint which I appreciated.

This is as good a time as any to remind people of the bad security assumptions they may be making.

Unless you’ve taken specific steps to ensure that your telephone line is secure (which is rare), you should assume that it is not. Wireless phones and cellphones in particular are in general not secure. You should never give anyone any personally identifiable information like your Social Security number or your bank account number over the phone. No reputable person should ask for such information over the telephone.

Unless your email is encrypted that’s not secure, either. Even if it is encrypted it may not be particularly secure. The analogy I generally use is that an email isn’t like sending a letter; it’s more like posting a notice in the town square. Don’t put anything in the notice you don’t want the whole town to know.

BTW, your bank probably has a compliance officer (mine does—it’s a publicly traded company) and failures to conform to best practice should be reported to the compliance officer.

And people wonder why I say that banks aren’t security-oriented.


Stability in Afghanistan and Other Oxymorons

There’s a lot of tooth-gnashing going on today about President Obama’s decision that we’ll have troops in Afghanistan for a few more years both by those who think we should have withdrawn from Afghanistan already and those who want to use substantially more force there than we already have. Are there any bets on which will come first? The end of President Obama’s second term or our withdrawing from Afghanistan?

The editors of the Washington Post are pleased with the president’s decision:

PRESIDENT OBAMA on Tuesday announced a much-needed adjustment in his plans for drawing down U.S. forces in Afghanistan, telling visiting President Ashraf Ghani that a scheduled halving of the 9,800 currently deployed troops by the end of this year would be set aside, and the force maintained into next year. This was a sensible response by Mr. Obama to a range of developments, including Mr. Ghani’s impressive efforts to improve relations with Washington. But the adjustment still falls short of what will be needed to give the new Afghan government a reasonable chance of success.

The president’s decision will allow for U.S. forces to remain at bases in eastern and southern Afghanistan that are critical for gathering intelligence and launching counterterrorism operations against al-Qaeda. It will also enable air and other logistical support to Afghan troops as they battle what is expected to be a fierce Taliban offensive this spring and summer.

Perhaps most important, Mr. Obama’s decision, accompanied by a commitment to fund Afghan military and police forces at their present levels through 2017, sends a message to the Taliban, which still hopes to overwhelm the Afghan army as U.S. support declines. The more the United States remains committed to continuing military aid to Mr. Ghani’s government, the more likely it is that Taliban leaders will finally respond to his persistent efforts to engage them in peace talks.

As the late Sam Goldwyn is alleged to have said, if you want to send a message, call Western Union.

I wonder when President Obama’s supporters will be willing to stop thinking of the president’s policies as pragmatic? If the president’s decision to increase our forces in Afghanistan was a pragmatic one, it was also wrong. The situation in Afghanistan is little changed from what it was when he took office other than four times as many Americans having been killed there as when he took office. As I said at the time, that was a foregone conclusion when he made his decision. The number of casualties is mostly based on operational tempo. In my view the president’s decision to put more troops in Afghanistan was based on domestic politics, his decision to withdraw troops from Afghanistan was based on domestic politics, and his plan to leave more troops in Afghanstan is also based on domestic politics.

One of the things about having put your views into writing over a period of eleven years is that there’s a record of what you think. I hold the seemingly contradictory views that we should never have invaded Afghanistan but having done so we should commit to retaining a small force, 10-20,000, for the foreseeable future. There are several reasons for that. First, such a force could prevent Al Qaeda from re-establishing itself there. Second, we owe a debt of honor to the Afghan people. Third, Afghanistan is incapable of defending itself without outside help and the idea that we’ll continue to provide such help in the absence of a U. S. troop commitment is a fiction.

Also, just about anybody who actually knows anything about Afghanistan has said much the same thing. I’ve documented that a-plenty over the years.


Entrepeneurialism = Cadging Around for Subsidies?

Speaking of tantrums, I think that Holman Jenkins’s most recent WSJ column about Tesla Motors may qualify:

Elon Musk has proved that a market exists for electric cars, despite their many inconveniences, especially if they come wrapped in taxpayer subsidies. He hasn’t proved he can make a profit.

His idea of an industry at scale, he would probably be loath to admit, almost certainly depends on government intervention to make gasoline-powered cars increasingly prohibited. His gigafactory, to which he will commit $2 billion to double the world-wide capacity of existing lithium-ion batteries, is a mute acknowledgment that he sees no battery breakthroughs in the offing that would transform the problems of range anxiety and recharge times.

I will be very interested in seeing how much it actually takes to double the worldwide capacity for producing lithium-ion batteries. In the past I’ve speculated that one of the reasons more electric vehicles aren’t being produced is that they can’t produce them any faster. Elon Musk’s throwing a couple of bil at increasing battery production should tell us something.

When did entrepeneurialism become cadging around for government subsidies? Has it always been that way, has there always been a strain of that, or is it something new? I know that John D. Rockefeller founded his fortune on war profiteering during the Civil War so it’s not exactly a new thing.



One of our dogs, our youngest, throws tantrums. Whenever we crate her or have her do something she doesn’t want to do she barks, growls, thrashes, and scratches furiously at the floor. She’s even snapped at me a couple of times, something we don’t tolerate. This morning the editors of the Wall Street Journal are throwing a tantrum about the president’s throwing a tantrum over the results of the Israeli elections:

You’ll have to forgive President Obama. The leader of the free world is still having difficulty accepting that the Israeli people get to choose their own prime minister, never mind his preferences.

The latest White House tantrum in the wake of Benjamin Netanyahu’s re-election last week took the form of a speech delivered Monday by Chief of Staff Denis McDonough, in which he declared that “an occupation that has lasted for almost 50 years must end.”

When a chief of staff speaks in public, especially as the keynote speaker at a scheduled event, the President has signed off. In this case the audience was also carefully chosen: the annual conference of J Street, a left-leaning Jewish lobbying group that has never met an Israeli concession it didn’t like. Which makes it all the more distressing that Mr. McDonough would talk about Israel in language usually associated with Palestinian terror groups.

The entire editorial is pretty harsh. Unduly so for my tastes.

My general view is that we shouldn’t involve ourselves one way or another in foreign elections just as we wouldn’t want foreigners to insert themselves into ours. Indeed, I think there should be more scrutiny on foreign money coming into our elections, harsher penalties for accepting it, and that you didn’t know should be no excuse. But that’s a different subject.

For years U. S. policy has been strongly pro-Israel and in my view that has been somewhat decoupled from our actual interests. I would be happier if we took a more detached, objective approach. The corrective for years of pro-Israel policy isn’t years of anti-Israel policy, however popular that might be in college faculty lounges, and should be firmly moored in actual U. S. interests. Maybe I have a tin ear but I don’t get that impression from the Obama Administration.

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Playing Catch Down

Your phrase for the day is “catch down”. If you’ve been surprised or puzzled or both by the robust job growth figures being published by the Bureau of Labor Statistics, you’re not the only one. So have the analysts at Goldman-Sachs:

One of the big debates among economists now is whether the economy will catch up with the booming U.S. jobs machine.
The year so far has been characterized by downside surprises across a wide array of economic indicators. Retail sales slumped in February and factory output fell for a third consecutive month. Continued strength in the labor market has been one of the only positive outliers.

Now, Goldman Sachs Group Inc. is weighing in. Job growth will have to slow going forward to catch down to the rest of the data, according to David Mericle, a Goldman Sachs economist, who says the pace of employment gains has “been running ‘too hot’ recently” relative to overall economic growth.

“Our model suggests that the recent 275-300k rate of monthly payroll gains is likely to be as good as it gets,” Mericle wrote in a note to clients. “Under our baseline forecast for 3% real GDP growth this year and next, we expect a gradual deceleration to a roughly 200k rate. The risks to both the GDP and employment numbers in 2016 are a bit to the downside.”

The article is accompanied by lots of nice charts and graphs.

My rule of thumb is that if ordinary people are behaving as though the economy were improving it probably is. They haven’t been so it probably isn’t whatever the BLS says. I also note that for the last several months the establishment survey has diverged substantially from the household survey. The BLS doesn’t simply report raw numbers. They apply several fudge factors to the numbers and one of the fudge factor they apply is called the “birth-death ratio” which means their guesstimate, based on history, of how many business are formed or eliminated over a given period.

Another of my rules of thumb: when the fudge factor you’re applying is a lot bigger than the changes in the data you’re trying to measure, a little skepticism is due and that’s the way it is with the birth-death ratio. I think the model needs some recalibration.

Meanwhile we’ll just have to hope that the BLS establishment survey is right and everybody else is wrong.

We can also relish our new phrase. I’ve been catching down with things for years. See? Handy.


The Response to the Epidemic

In the middle of a New York Times article on the worldwide response to the Ebola epidemic in West Africa, I found this passage:

“We considered the only organizations in the world that might have the means to fill the gap immediately might be military units with some level of biological warfare expertise,” Christopher Stokes, general director of M.S.F., is quoted as saying in the report. Dr. Joanne Liu, the group’s international president, added, “U.S. helicopters would not even transport laboratory samples or healthy personnel returning from treating patients.”

Jeremy Konyndyk, director of the Office of Foreign Disaster Assistance at the United States Agency for International Development, said in an interview that those criticisms reflected a misunderstanding of the American military’s capabilities.

“There was a perception among M.S.F. and more broadly that surely somewhere in the Pentagon there must be some rapid biohazard response team that could go and do this,” Mr. Konyndyk said. “That just wasn’t the case.”

Let’s decompress that a bit.

  1. Foreign health authorities assumed that the U. S. had a biohazard rapid response team.
  2. We don’t have a biohazard rapid response team.
  3. There was a certain level of resentment at what we were able to do.

and this despite the fact that the value of the U. S. contribution to fighting the epidemic dwarfed that of any other country.

That brings up all sorts of interesting considerations. For example, we don’t have a biohazard rapid response team. Should we? Such things are very expensive. How much should we be willing to pay for something that may never be used or may only be used once every couple of decades? How much should the rest of the world expect us to pay for it and why? Whatever your answer how is that consistent with how much you’re willing to spend on defense?

Should other countries be more aware of what capabilities we do or do not have? Answer carefully. You’ll be telling your enemies as well as your friends.

Also, note that resentment was baked into the reactions quoted above. Rather than being grateful for the aid we provided I interpret Dr. Liu’s rejoinder as resentment at the level of capability we were able to provide.

Just as a reminder the epidemic is not over. Based on the World Health Organization’s most recent weekly reports there have been about 150 new Ebola cases in the three subject countries in each of the last two weeks. That’s down from the 300 new cases per week they had been reporting for months which provides at least some hope that the epidemic may actually end. But it isn’t over yet. Not nearly.