Rognlie on Piketty

Jim Tankersley's Wonkblog post invites us to 'Meet the 26-year-old who’s taking on Thomas Piketty’s ominous warnings about inequality', at The Washington Post.

"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."

(via MacIver Institute)