French economist and academic Thomas Piketty. REUTERS/Charles Platiau
On March 19, 2015, Jim Tankersley writes in The Washington Post:
It was 2:45 a.m. on a Thursday last April. Matthew Rognlie was still awake, like a lot of graduate students. He had just finished typing 459 words and a few equations. They totaled six paragraphs, which he posted to the comments section of a popular economics blog.
Thus begins the unlikely story of, arguably, the most-influential critique of the most influential economics book of this century.
Rognlie’s comment on the blog Marginal Revolution was a response to the provocative argument laid out by the French economist Thomas Piketty in his bestselling book on wealth inequality, “Capital in the Twenty-First Century.”
Piketty had worried in his book that wealth inequality could soon explode at such a velocity that it would continue to widen essentially on autopilot. Wealthy people would accumulate more capital in the form of stocks, real estate and other assets, would continue to earn high returns on them, and then would have more capital to invest. As more and more money became concentrated among the wealthy, less and less would be available to workers. The book turned Piketty into an international celebrity.
Rognlie, however, wrote in his blog post that the French economist’s argument “misses a subtle but absolutely crucial point.” Piketty, he said, might have got the pattern in reverse. Instead of the returns to capital increasing in perpetuity, Rognlie said, they might be poised to decline.
With that quick post, Rognlie was challenging the most politically earthshaking prediction about inequality and the economy in recent memory.
The comment blossomed into a near-unprecedented career opportunity for a student who just recently turned 26 years old, and who remains a year away from earning his doctoral degree. It will culminate on Friday morning at the Brookings Institution in Washington, where Rognlie will present a research paper before an often-cutthroat audience of all-star economists, including a Nobel Prize winner, Robert Solow, who will critique Rognlie’s analysis.
Organizers say it will almost certainly be the first paper at the prestigious Brookings Papers on Economic Activity that was commissioned based on a blog comment. It is also a rare honor for a graduate student to present a sole-authored paper there; a quick scan of Brookings records shows a similar appearance by the now-renowned economist Jeffrey Sachs when he was a doctoral student in 1979.
“It’s made Matt famous,” said Tyler Cowen, the George Mason University economist who runs the Marginal Revolution blog, and who elevated Rognlie’s comment into a standalone post on his site. “It was brilliantly reasoned and right on target. And very elegant.”
There are two concepts at the heart of Rognlie’s Brookings paper.
One is that Piketty drew too broad a conclusion about the nature of capital in this era than he should have based on the evidence. Piketty assumed that the returns to capital were increasing across the economy. Rognlie found the trend to be almost entirely isolated to the housing sector.
Yes, some investments with a high level of intellectual property, like computer software, had become extremely valuable in the hands of the wealthy. But some of those assets were unlikely to remain valuable for very long, like a software program that needs to be replaced in a few years with a new version. When adjusting for that depreciation, most of the rest of the increase in capital came in housing, a single sector that, while important, might not shape the entire future of inequality as Piketty assumed.
The second finding was that Piketty probably overestimated how high the returns to capital would be in the future. For his fears to come true, wealthy people who amass more and more capital would need to keep earning a high return on that capital. But, Rognlie’s research suggests, the returns to capital will decline over time unless it is very easy for the economy to substitute capital (like robots) for labor (workers) – far easier, in fact, than historical evidence suggests is normal. Thus, if history is a guide, the wealth-inequality autopilot will slow itself down over time.
“Piketty’s story has multiple steps to it. I’m sort of showing that one of the steps does the reverse of what he says it does,” Rognlie said in an interview. Those findings, he added, suggest “there doesn’t seem to be a big need for panic” over Piketty’s predictions.
Rognlie grew up in West Linn, Ore., a Portland suburb, the son of a librarian and a data analyst for an insurance company. He was drawn to economics at a young age, because it unified his interests: math and computer science and public policy. He earned a full academic scholarship to Duke, blemished his grade-point average with exactly one A-minus, and chose M.I.T.’s economics doctoral program, one of the country’s most prestigious.
For a while Rognlie kept his own economics blog; his last entry, from 2011, argued that professional sports teams and then-Texas Gov. Rick Perry “use the same shady economic methodology to promote their policies.” In recent years, he focused more on class and research, and he occasionally left comments on popular econ blogs. He was one of the first Americans to see Piketty’s Capital before it took the wonk world by storm. His officemate, a native of France, had a French-language copy before the book was translated into English.
Rognlie had just finished reading the English version of the book last year when he read a Marginal Revolution post about economist (and New York Times columnist) Paul Krugman’s review of Piketty. The labor-capital substitution problem was nagging at him. He posted his comment on Cowen’s blog.
After Cowen elevated the comment, other economists began to write about it. Rognlie soon spun this thoughts into a 23-page paper posted on his student website.
Justin Wolfers, the University of Michigan economist who co-chairs the Brookings confab, said Rognlie’s critique was “easily the clearest” one of Piketty that he had read. “As I read the paper,” he said, “I found myself learning about stuff that I should have known.”
Wolfers asked Rognlie to broaden his research even more and present it at Brookings. All of the BPEA papers are critiqued by a roomful of economists, starting with a discussant chosen by the chairmen. Rognlie’s discussant will be Solow, a Nobelist who teaches at M.I.T.
Piketty won’t be there, but he and Rognlie have debated over email. Responding to a reporter’s questions this week, Piketty said “there is some misunderstanding” about his book and Rognlie’s critique of it. He said he never predicted inequality would “rise forever” — only that it could reach “higher levels than what we have today, and that this is sufficiently important to be concerned.”
He also said Rognlie could be underestimating the ease of substitutions, because technology is making it easier for companies to switch from workers to machines. (As an example, he cited drones potentially replacing delivery workers at Amazon.)
Rognlie was about to fly to Washington when a reporter sent him Piketty’s response. He wrote back, saying Piketty was more or less missing the broader point. To justify predictions of growing inequality, even caveated ones, he said, you need to show a “concrete argument” that it will be far easier in the future than it has been in the past to swap out capital and labor. Piketty, he said, had not done that.
The full e-mail was wonky and dense. It summed to about 1,800 words — or about four blog comments.
http://www.brookings.edu/about/projects/bpea/papers/2015/land-prices-evolution-capitals-share
Matthew Rognlie is attacking the idea that rich capitalists have an unfair ability to turn their current wealth into a lazy dynasty of self-reinforcing investments. This theory, made famous by French economist Thomas Piketty, argues that wealth is concentrating in the 1% because more money can be made by investing in machines and land (capital) than paying people to perform work (wages). Because capital is worth more than wages, those with an advantage to invest now in capital become the source of long-term dynasties of wealth and inequality.
Rognlie’s rebuttal to Piketty is that “recent trends in both capital wealth and income are driven almost entirely by housing.” Software, robots, and other modern investments all depreciate in price as fast as the iPod. Technology doesn’t hold value like it used to, so it’s misleading to believe that investments in capital now will give rich folks a long-term advantage.
Land/housing is really one of the only investments that give wealthy people a long-term leg up. According to the Economist, this changes how we should rethink policy related to income inequality.
Rognlie does not address the fact that a house is for consumption and that any increase in value is only realized when one sells the house or uses the equity value to borrow against as a form of savings to pledge as security, when borrowing to purchase products or services for consumption or for a capital asset investment. Capital acquisition, on the other hand, takes place on the logic of self-financing and asset-backed credit for productive uses. People invest in capital ownership on the basis that the investment will pay for itself. The basis for the commitment of loan guarantees, that I advocate, is the fact that nobody who knows what he or she is doing buys a physical capital asset or an interest in one unless he or she is first assured, on the basis of the best advice one can get, that the asset in operation will pay for itself within a reasonable period of time––5 to 7 or, in a worst case scenario, 10 years (given the current depressive state of the economy). And after it pays for itself within a reasonable capital cost recovery period, it is expected to go on producing income indefinitely with proper maintenance and with restoration in the technical sense through research and development.
Piketty is correct in his assessment that the role of physical productive capital is to do ever more of the work, which produces wealth and thus income to those who own productive capital assets.
But unlike Piketty’s call for a global wealth tax and redistribution, his and Rognlie’s reasoning is faulty as to the solutions. The reasoning should be that if productive capital is increasingly the source of the world’s economic growth, therefore, productive capital should become the source of added property ownership incomes for all. If both labor and capital are independent factors of production, and if capital’s proportionate contributions are increasing relative to that of labor, then equality of opportunity and economic justice demands that the right to property (and access to the means of acquiring and possessing property) must in justice be extended to all.
