Summers Reviews Piketty

May 14th, 2014 at 6:04 pm

Worth a read—generally quite positive and very insightful.

As have others, Larry raises objections to the prediction that r (the rate of return on wealth) will remain roughly constant as the amount of capital in the economy grows.

Larry’s on solid economic grounds, as per diminishing marginal returns theory: “As capital accumulates, the incremental return on an additional unit of capital declines.”  The question is, does the return fall proportionately to the accumulation?  TP says no, implying continuous wealth accumulation and higher inequality.  LS says probably, especially if you factor in capital depreciation.  [One thought here: computers depreciate relatively quickly (which have you replaced more: your laptop or your stove?)—as they become an increasing share of the capital stock, does it thus depreciate more quickly relative to past trends?]

Piketty’s best evidence, on the other hand—and as I read him, this evidence closes the deal for him re the above argument—is that r has, in fact, remained roughly stable, except when the capital stock was sharply diminished by war.

I agree with Larry that the most valuable attribute of the book comes from the data archeology by Piketty and others that made this work possible.  As Summers puts it regarding rising inequality: “After Piketty and his colleagues’ work, there can never again be a question about the phenomenon or its pervasiveness.”

Interestingly, though he dismisses the common argument that higher inequality is all about the return to skills–“There can now be no doubt that the phenomenon of inequality is not dominantly about the inadequacy of the skills of lagging workers”–Larry’s considerably more willing than I to cite pay-for-performance rather than rents among those that Piketty labels the “supermanagers.”  Summers arguments mirror those made by Mankiw the other night, so maybe it’s a Harvard thing.

–While TP argues that friendly corporate boards pay “rents” to their supermanagers, both Summers and Mankiw point to executives who are equally highly paid and who’ve been appointed by private equity firms who set their pay, presumably commensurate with their performance.

–Re finance, he cites investment managers who are compensated in part based on the returns they generate.

–He stresses the “winner take all” arguments that globalization and technology combine to provide today’s best entrepreneurs, athletes, and movie stars with global reach and thus huge returns relative to their historical counterparts.

I say “meh…” to all of the above, though I’d agree no one knows.  I’d guess PE firms must match the distortionary norms set by the broader corporate sector.  On finance, I’ve shown salaries moving inversely to regulation.  Moreover, while investors may be paid for returns, many were demonstrably not “unpaid” for systemic risks that turned out to be extremely costly.  If they’re getting pure upside, there must be rents at work (also, this part sounded a bit to me like he was defending the carried interesting loophole–yuk).  The winner-take-all thing is interesting but as I stressed in my debate with Greg, the “Robert-Downey-got-$50m-for-playing-Iron-Man” is a small part of the inequality problem.  Pay him like Clark Gable and not much would change.

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11 comments in reply to "Summers Reviews Piketty"

  1. George Kaplan says:

    I recall that remuneration of execuives in Europe.. primarily Scandinavian countries was quite low compared to the US but have increased due to US example,

  2. Sandwichman says:

    In his promotional email for the Summers review, Democracy editor Michael Tomasky called it a “comprehensive take on Piketty’s arguments.” Here’s my reply to Tomasky’s email:

    I’m not sure how “comprehensive” Lawrence Summers’s take on Piketty’s arguments is. Inequality has “microfoundations” to use the “dry technocratic prose of most contemporary academic economists.” And those microfoundations have been both concealed by the technocratic prose and reinforced by the resulting policy advice of academic economists, prominently including Dr. Summers.

    Nearly a century ago, Thorstein Veblen offered insights into one important mechanism underlying the concentration of wealth that he termed “industrial sabotage” or the “conscientious withdrawal of efficiency” by business. The basic idea is that the pursuit of maximum pecuniary gain is not the same thing as maximizing output of product. Veblen’s intuition is compatible with the neoclassical analysis of imperfect competition, but, as Warren Samuels noted twenty years ago, the dry technocratic academic economists who developed theories about efficiency wages and equilibrium unemployment didn’t seem to care that the “shirking” they contemplated was entirely one-sided. Lawrence Summers was among those self-styled “New Keynesians.”

    There is much, much more to say about these “microfoundations.” I have explored them in a series of blog posts at EconoSpeak titled “Microfoundations of Inequality and Sabotage.”

    • Jared Bernstein says:

      Very interesting Sman. One-sided shirking, indeed…

      • Sandwichman says:

        As Paul Samuelson wrote in the best-selling textbook of all time: “The canny seller contrives an artificial scarcity of his product so as not to spoil the price he can get on the earlier pre-marginal unit.” The obvious corollary to this rule is that the canny employer who has some monopsony power contrives an artificial surplus of labor inputs so as to restrain labor costs. Samuelson didn’t, however, explore the implications of the latter hypothesis.

        • Larry Signor says:

          “The obvious corollary to this rule is that the canny employer who has some monopsony power contrives an artificial surplus of labor inputs so as to restrain labor costs.”

          This is not just an abstract economic observation, but also a real life event. I currently work for a company engaged in just this type of labor manipulation. Labor in America is being horribly abused and now we are “shirkers”? Why the hell not?, is how most of US feel. I suppose the 99% could one day go Gault.

  3. Smith says:

    I haven’t read Summers’ take on Piketty yet, but the summary here indicates Summers totally disagrees with Piketty’s thesis r>g. Then from this second hand account, it seems Summers thinks inequality can’t be explained by a skills gap (which unfortunately might lead to thinking high skills can’t redress the problem), and that the cause of rising inequality is high income people being paid fair market value.

    I disagree in the strongest terms possible with the notion that Piketty’s data is the most valuable attribute of the book. That of course is also how Mankiw I believe in his blog has acknowledged the data. Why do they do that? Because the data represent facts. It’s very difficult to dispute facts recording by the Treasury Department, (though estimations and sampling by US Census is very much and justifiably open to question which is why Picketty doesn’t rely on those figures).

    This would be like if a book on climate change assembled for the first time comprehensive data and graphs on average temperatures, precipitation, wind, humidity, and composition of the atmosphere and level of particulates, and won universal acclaim but actual C02 induced warming was still denied.

    Ironically, Piketty claiming r will not decline contradicts Marx, while Summers arguing in support of diminishing r is opposed to what most observers on the right and left point to as a dramatic failure of one of Marx’s important precepts for the collapse of capitalism.

    How all too convenient Summers claims are that r won’t stay greater than g even without new measures to address inequality.

    ******************* So the above was my rush job without reading Summers, below is after *******************

    Summers is all over the map, defending the 1% the same way Mankiw does, but advocating policies which would substantially alter economic balance which Mankiw of course doesn’t. How so? Summers says the 1% earn much of the greater rewards flowing to them, partly as a result of structural changes to the economy (globalization meaning increased competition as well as concentration, automation, financial innovation). But then Summers argues for increased estate taxes, closing tax loopholes, infrastructure investment, strengthening collective bargaining, curbing shadow banking, accounting for too big to fail banks, profit sharing, increased education. I’m at a loss to explain his emphasis on zoning laws raising property values, I doubt that’s a serious way to redress the wealth distribution.

    So what is Summers missing? He states “So why has the labor income of the top 1 percent risen so sharply relative to the income of everyone else? No one really knows” Is Piketty a no one, because he claims to know. The rich take more because they can. Only war, destruction, depression, and revolution interfere with this. While admittedly Summers does more than throw bones to the left wing of the Democratic party, one suspects his sympathies are much more aligned with the 1%. Would anyone believe Mankiw’s praise of Keynes is sincere Would anyone believe Summers is sincere in the policies he advocates while at the same time professing ignorance of the causes of inequality? “No one really knows.”

    • Smith says:

      The latter “Would anyone believe Summers is sincere..” should more appropriately read simply “Is Summers sincere…”

  4. jeff says:

    “As capital accumulates, the incremental return on an additional unit of capital declines.”

    This is Marx verbatim.

  5. Robert Buttons says:

    The elephant in the room is that financialization massively increased (and the concomitant inequality) after Nixon ended Bretton Woods. The borrow and spend big government economy, that Piketty falsely labels “capitalism”, benefits only the well-connected,

  6. Amit says:

    All good points Jared. As someone commented earlier, Summers’ argument that executives get what they deserve is just like Mankiw’s argument – both completely ignore benchmarking (both to historical pay and to that in other countries like Japan, Germany etc.). Ever since Summers lost the Fed nomination, he seems to be out there peddling himself as a “liberal” economist, but methinks he’s only trying to show the Dems he can get public backing next time they nominate him for a role. He’s a 1% apologist just like Mankiw in my book.

    Re: the point about Robert Downey earning 50M due to globalization, only Dean Baker seems to make the point repeatedly (and walk the talk along with you) that the reason these actors/singers/authors earn so much is that governments act as global enforcers for them. I don’t recall any government stepping in when manufacturing workers were being displaced by the same technology/globalization. Only with a warped sense of morality could anyone justify this disparity/inequality of outcomes. It’s not the free market (no market is anything but what the government wants it to be).

    • Smith says:

      Downey gets paid as if he was a banker due to the unique leverage actors have because (after breaking the studio system) studios spend even more money selling the public on the star system. The movie industry has this money because it’s an oligopoly, not because of foreign markets protected by U.S. copyright law in Europe, boosting sales. That anyone gets paid that much is a function of falling tax rates. It’s a zero plus 2.2% productivity growth game, and if you don’t want the 1% to keep taking more of the pie, you have to confiscate it with 90% tax rates. It’s that simple!

      I’ll save you the trouble of clicking the link because it’s short enough, but it is not globalization that creates excessive compensation in Hollywood. It has much more to do with oligopolies creating barriers to entry, and driving up costs for everyone. The movie and sports industry also are unique in satisfying a human need for heroes and royalty. Even without ridiculous copyright extensions and overseas markets, actors would be raking it in. Rich movie studios crowd out and take over independents as surely as rich urban residents gentrify neighborhoods and bid up the costs which only the rich can afford. Perhaps one could argue if a movie studio is a natural oligopoly due to the nature of the business, but the history of the industry is one of anti trust action, restricted labor mobility, and questionable acceptance of the cultural role of Hollywood royalty. One can applaud and admire Robert Downey for taking the $50 million instead of some bean counter, and still be disgusted by that level of compensation being awarded to anyone at today’s tax rates. As late as 1963, he’d get taxed at 90% for income over $2 million.

      The following originally appeared here:
      smith says:
      April 28, 2014 at 2:27 pm

      The movie industry is notoriously monopolistic. While the studio system no longer exists, there is an arms race of movie promotion among distribution channels that crowd out competitors keeping the cost of entry prohibitively high. Even behemoths such as HBO and Netflix enter the arena cautiously. There was the case of United Artists where artists united to form their own studio in the 1930s, and the anti trust case in the 1940s to break up the vertical integration whereby studios had to sell off their interest in theater chains. Today tens of millions of dollars are spent on productions that are no better than movies made for a fraction of the cost (adjusting for inflation) So too, sports stars are subject to the same non-competitive pressures where the business model is closed, monopoly is enshrined in law, and athletes would be foolish not to gain as large a share as they can of the rents extracted from the 99%. Using very uncompetitive industries as a model for compensation is ridiculous. A dozen coffee shops opened up in my neighborhood recently to compete with Starbucks, but not one movie studio, bank, or brokerage firm. Guess who gets paid more?