We have a world in which some eminent economists (Larry Summers) say r1 is too low, and other eminent economists (Thomas Piketty) say r2 is too high…
The difference between r1 and r2 is the risk premium. In a well-functioning market economy with well-functioning financial markets, there are powerful reasons to believe that this risk premium should be small: less than 1%-point per year. The fact the risk premium appears to me to be 7%-points per year today is a powerful evidence of the profound dysfunctionality of our financial markets, and of their failure to do their proper catallactic job. But that is a separate and largely independent discussion: that is a dysfunction of our modern market economy which is different from either the dysfunction feared by Summers or the dysfunction freaked by Piketty. For the moment, simply note that it is perfectly possible for all three of these major dysfunctions to occur together.
Pointer from Mark Thoma. Read the whole thing. The risk-premium solution was also suggested here in a comment by Matt Rognlie.
So far, the left-wing journalistic verdict on Piketty is rapture. Economists, even those inclined to agree with Piketty’s conclusions, seem somewhat unsatisfied with with his treatment of capital and interest.
I haven’t read reviews of Piketty which discuss how he handles expected entitlements with respect to wealth.
It’s clear to me that an American with $100k in assets at age 65 expecting a pension and Social Security payments is a lot wealthier than a non-American (in America) with $100k of assets but no pension nor SS expectations.
Similarly, the SS and medicare payments made in the last 10 years to various 0.01% … 1% … 20% groups should be accounted for as part of their wealth if looking at it from 2004. I don’t think social entitlements are part of the wealth that is considered, but it should be.
Perhaps I’m missing something?
(Thanks for getting Piketty name correct.)
Last nite Bill Moyers showed the left wing rapture about Piketty, and Krugman basically joined in.
I am not trained as an economist, but I have the followng reasons to be skeptical of Piketty:
a. Quite a few of the top 1% are liberals, and give to liberal causes
b. Swedish billionaires have gotten richer also, yet they have not overthrown their welfare state.
c. Sheldon Adelson could not get his man nominated even by the Republicans
d. Michael Bloomberg has not achieved gun control.
e. The contention that America is the most unequal society seems silly. Real oligarchs like Trujillo and Mugabe and others literally owned a large part of their nation’s treasuries, and tried to take the money with them.