Thomas Piketty’s book, "Capital in the Twenty-First Century," continues to delight American economic dilettantes who marinate in Keynesian confirmation bias, but there’s a reason even socialists in his native France don’t think that much of his Das Kapital 2.0.
New York Magazine called him a “rock star economist” which…look, come on. Need I say more? They just threw the word credibility into a negative feedback loop.
Most critics have pointed out the fundamental problems in Piketty’s research and conclusions, as well as his methodology, but what about the problem Piketty has on housing?
As the Veronique de Rugy notes on the Upshot, "One recent paper by four economists at l’Institut d’Etudes Politiques de Paris challenges Mr. Piketty’s view that inequality has increased because the return to capital has been greater than general growth in the economy. The current shorthand is 'r > g.'
"The paper argues that the higher growth of capital rests entirely on returns to housing, and takes technical issues with the book’s treatment of housing, too," Rugy says. "If Mr. Piketty’s argument depends on housing, it hardly seems to match his basic story about the ongoing ascendancy of capitalists."
That paper, which is available in English, concludes the following:
First, the author’s result is based on the rise of only one of the components of capital, namely housing capital,and due to housing prices. In fact, housing prices have risen faster than rent and income in many countries.It is worth noting that “productive” capital, excluding housing, has only risen weakly relative to income over the last few decades. Over the longer run, the “productive” capital/income ratio has not increased at all.
Second, rent, not housing prices, should matter for the dynamics of wealth inequality, because rent represents both the actual income of housing capital for landlords and the dwelling costs saved by “owner-occupiers” (people living in their own houses). Logically, to properly measure capital, the value of housing capital must be corrected by measuring it on actual rental price, and not housing prices.
Third, when we apply this change, we find that the capital/income ratio is actually stable or only mildly higher in the countries analyzed (France, the US, the UK, and Canada) except for Germany where it rose. These conclusions are exactly opposite to those found by Thomas Piketty. However, this does not mean that housing prices do not contribute to other forms of inequality. When housing prices rise, owners of the housing capital hold a higher value that can be transformed into consumption. It is also more difficult for young adults to become homeowners. Housing incomes of owners however do not necessarily increase which casts serious doubt on Piketty’s conclusion of a potential explosive dynamics of inequality based on these trends.
The bottom line is these three conclusions are exactly opposite of what Piketty’s research purportedly shows.
This seems to happen a lot to this rock star.
(I can't thank Bloomberg Businessweek enough for this.)