Alberto Mingardi  

Foglia on Piketty and inequalities

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Thomas Piketty's "Capital in the 21st Century" has been widely debated. So, one wonders if there is anything new that could actually be added at this point.

I found this article by Antonio Foglia quite intriguing. I shall disclose that the author is a dear friend and a member of the Board of Advisors of Istituto Bruno Leoni. But he is also, as Project Syndicate points out, a member of the Global Partners' Council of the Institute for New Economic Thinking, so perhaps his piece will be read in some unexpected quarters.

Foglia's criticism of Piketty is clear and fundamental:

Piketty observes a rising wealth-to-income ratio from 1970 to 2010 - a period divided by a significant change in the monetary environment. From 1970 to 1980, the Western economies experienced rising inflation, accompanied by interest-rate hikes. During that period, the wealth-to-income ratio increased only modestly, if at all, in these countries.

From 1980 on, nominal interest rates fell dramatically. Not surprisingly, the value of wealth rose much faster than that of income during this period, because the value of the assets that comprise wealth amounts essentially to the net present value of their expected future cash flows, discounted at the current interest rate.

He also points out, in comparing Italian and German families, that wealth is shaped by household investment decisions (i.e., Italian families have a fetish for home ownership). The article is, I think, well worth reading.

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CATEGORIES: Finance , Property Rights

COMMENTS (3 to date)
Warren writes:

One related thought I've had is how inflation impacted compensation. With higher inflation you want to get paid in non-taxable ways, such as health insurance (in the US) or with retirement. I would like to see estimates of income changes that fully reflect compensation. I wonder if higher inflation caused a shift in how we get paid.

For some work on this, I like the EconTalk with Burkhauser.

I wonder how robust the increase of income inequality is if you change the meaning of income, as Burkhauser does on the chart in the link above.

Ben H. writes:

"because the value of the assets that comprise wealth amounts essentially to the net present value of their expected future cash flows, discounted at the current interest rate"

OK, I'm no economist, but shouldn't the last bit of that be something like "discounted at the expected time-averaged future interest rate" or something? Who cares what the interest rate is at this very moment in time? It's what you expect the interest rate to do over the course of future years that matters. So re: Foglia's criticism, wouldn't he need to show not only that the interest rate had fallen over that period of time, but also that there was reason to believe that that was a fairly permanent state of affairs, and thus would be expected to be predictive of interest rates far into the future?

Dan writes:

This is simply not correct. Values are determined based on real rates not nominal rates.

The real rates in 70-80 period were significantly lower then the post 80 time period. In fact, they were negative during most of that time period.

There is actually a word for this type of incorrect valuation: "Money Illusion". One of the co-bloggers here may know a thing or two about it ;)

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