I have not read it, but Tyler is touting it. Apparently, Piketty argues that it is normal for the return on capital to exceed the growth rate of the economy.
I always thought that this was impossible. Ten years ago, I wrote,
If stock prices grow at 7 percent per year while the economy grows at 2 percent per year, then the ratio of stock prices to GDP (P/Y) fifty years from now will be more than ten times what it is today. How could that happen?
If the price-earnings ratio of the stock market (P/E) stays constant, then in order for P/Y to increase tenfold, the ratio of earnings to GDP (E/Y) has to increase tenfold. However, corporate profits are over 10 percent of national output today, so that if the ratio increases by tenfold, then corporate profits will be more than 100 percent of national output. That is impossible.
Alternatively, suppose that the ratio of corporate profits to national output stays constant. Then we need the P/E ratio to increase by tenfold in order to get a tenfold increase in P/Y. So, if the P/E ratio today is about 25, then in fifty years it will be 250. That would require investors to almost ignore risk and the time value of money in valuing stocks. No one believes that this is possible.
Perhaps Piketty has a better grasp on this than I do. But if the return on capital is going to exceed the growth rate of the economy, then this strikes me as powerful argument in favor of privatizing Social Security, so that people don’t get cheated out of these wonderful returns. 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?