I didn't see who the author was before I started reading, but as soon as I saw the word "upzoning" my Yggles alarm went off (correctly).
I don't really understand why depreciation is calculated the way it is. My lab has a bunch of robots. This year they are technically fully depreciated, but that doesn't mean they're worth nothing, we still do lots of useful things with them. So will our productivity shoot way up next year because our depreciation cost dropped to 0 but our output from the robots will remain roughly constant? Or is the assumption that they'll require a lot of maintenance, equal to the cost of depreciation? The fact that you're allowed to fiddle with depreciation rates in different contexts makes me think a lot of it is fiction.
Yes, obviously a house (but not the land its on) will eventually be worth 0 if you let it sit there long enough because it will rot and fall down, but shouldn't return be calculated based on things like rental value generated + resale value vs ongoing maintenance cost + initial investment?
I have some conceptual trouble with this stuff, too, because of all the finagling.
My lab has a bunch of robots.
Super duper jealous right now.
Good God, that article was clickbaitty.
I could barely even tell what he was saying. (In his defense, I haven't had coffee yet and didn't follow any of the links, because I'm sort of on vacation.) It seems like he's saying that inequality isn't quite as bad as it seems, if you count the appreciation of housing separately from everything else? And therefore zoning is bad?
Also, it's annoying to see Yglesias for the first time in months and he's just on his anti-zoning hobbyhorse. Especially after spending last week arguing with libertarians on Reddit.
We're probably getting rid of a couple of the depreciated ones, do you want one? They've only handled relatively harmful pathogens (cholera, malaria, streptococcus, trypanosomes, norovirus, toxoplasma.)
...arguing with libertarians on Reddit.
It's so tempting, isn't it? I like getting into big fights with Red Pill assholes. I just had a long round of argument with a peckerhead about rape jokes. It would be more fun if I cared less, but I still get something out of it. I never convince the guy I'm arguing with but I like to think that the other readers might be swayed a bit. And the Red Pill really needs pushback.
For the past few months, there's been a guy living out of his car in the parking lot at my work. If it weren't for height restrictions he'd probably have a bigger car.
We had a fun time when I was in grad school and my officemate's lab robot (a big six-wheeled rover thing) was hacked because they left its wireless on and it was some terrible unpatched version of Redhat. Fortunately the hackers didn't seem to notice the extra I/O devices.
1: I think the problem is that calculating that sort of thing is really hard. Depreciation is totally a fiction, but a useful one - you know that capital assets degrade over time in some way, but you don't know how long that is, so you use some sort of accounting standard depreciation term that is supposed to be not too far off on average.
Yes, your paper productivity will shoot up, which is why many financial analysts look at things like EBITDA, but from a tax perspective it would be weird if buying a capital asset that will get used up never counted as an expense, and it would be stupid if it all counted in the first year.
Dude one of us here can control virus-infected robots and send them outside the laboratory?!?
Unfortunately, Yggles blew his credibility completely on these issues long ago (upzoning!), so let's wait and see if someone competent can provide an analysis and assessment.
Depreciation is indeed super and endlessly complicated, my vague impression of tax law is that about 1/3 of it is (or really used to be until the rules were simplified) complicated arguments about depreciation.
4: I think it's distinguishing between the claims:
1) Inequality (between persons) is big right now
2) Capital's share of income has been rising
3) We should expect capital's share of income to continue to rise due to basic economic forces we can't really change
The article says that the first claim is true:
Piketty's empirical finding that wealth inequality has risen drastically is untouched.
The article is saying that the second claim is still true but the effect is much smaller than it looked like, because Piketty implicitly assumed that when you buy a capital asset, it is always as valuable as the day you bought it - that things don't get run down and have to be replaced.
The article is saying that the third claim is false, because most of the left-over effect is in housing, which is a very particular submarket where we do in fact know why capital's share of income has gone up (increased housing prices in major metropolitan areas), and have some pretty good ideas how to address the root problem (permit increased construction of housing in those areas, build better transit systems to make more populated areas convenient to areas with high-wage jobs).
HEY YGGLES HERE'S CHOLERA BOT COMING AFTER YOU
Yes but: Is Rognlie saying something new and interesting?
Yet if labor's falling share of national income is entirely accounted for by the increased returns to housing capital, then it seems we should be looking at housing-specific trends to explain the problem.
Does "labor" here mean all wages, including the high-income wages of Piketty's "super-managers"? Because from reading the summaries, I don't see how any of the Roglie analysis addresses the issue of the stagnation of middle-to-low-income wages relative to the growth of high-income wages. That trend exists and is distinct from "labor's falling share of national income", right? It is also seems much better explained by globalization, increased automation, and declining rates of unionization than it does by housing.
The article is saying that the second claim is still true but the effect is much smaller than it looked like, because Piketty implicitly assumed that when you buy a capital asset, it is always as valuable as the day you bought it - that things don't get run down and have to be replaced.
Wait really? I admittedly didn't read the whole thing (or close to it) but I thought he didn't make that assumption?
14, 16: Hadn't heard of Rognlie before this, but the knock on Piketty for depreciation is not a new argument. Maybe Rognlie advanced it somehow.
Here's an actual for real knowledgeable person (and FOTB) discussing the issue.
Summers also brought up depreciation as Piketty's fatal flaw, and concludes, regarding diminishing returns to increasing capital:
I know of no study suggesting that measuring output in net terms, the elasticity of substitution is greater than 1, and I know of quite a few suggesting the contrary.
The problem here (I think I'm getting this right) is that he's reviewing Piketty's book, which is a study that suggests an elasticity greater than 1, at least under many circumstances.
As Delong says in the link in 18:
As best as I can quickly calculate on the back of my envelope , if we calibrate the Belle Époque to Rognlie's model, the model sees income from capital back then as roughly 18% of net total income-less than half of its actual value-and sees a sharp rise in the capital share of net income to 25% in the post-WWII Social Democratic Era. That did not happen. Something else is going on ...
My understanding of Piketty is that his key contribution was explaining how the world has worked, and his theory gets more tenuous when he extends it into the future. The problem with his critics on depreciation is that their theory seems to have trouble when you extend it into the past.
(But this is all really over my head, and I'm only opining on it here to try to work it out for myself.)
16: I don't know whether in fact Piketty failed to account for depreciation, but that seems to be the claim of the Vox article and other summaries I've read of Rognlie's work.
15: Yes. That's entirely right. Capital's share of income is a different economic concept than wage inequality, though both contribute to wealth inequality and income inequality and there's a positive feedback loop between them.
I think the implication is that basically, wage inequality alone just isn't that interesting, since without the capital aspect it doesn't perpetuate itself. The typical case of wage inequality is a star basketball player. The typical case of wealth inequality due to capital's high share of income is wealthy heirs using their riches to start big businesses.
It's not unlikely that I've gotten a garbled version of this and the claim is that Piketty accounts for depreciation but inadequately.
The typical case of wage inequality is a star basketball player.
No it's not -- not even a little. Basketball players are freak cases where there's almost no interplay between family class background and wealth and ultimate wage inequality. I mean, it depends on what purpose you want a 'typical' case to exemplify, but almost always a highly paid manager or professional is going to be a more generally illuminating case.
23: "star basketball player" -- was that intended as a reference to Nozick's use of Wilt Chamberlain? That kind of makes LB's point.
And that usually doesn't even contribute to wealth inequality, since the average star basketball player has a career of less than 10 years and a plethora of destitute friends and relatives asking for money, so it goes away fast.
I'm so glad I was raised to ignore destitute friends and relatives. It's sort of the secret of middle-class living.
I have been following this for a few weeks, cause you know, I also have been reading de Ste Croix's Class Struggle in the Ancient Greek World which is largely about a 1500 years of rapacious aristocracies based entirely on inheritable real estate, the appreciation of real estate values, cheap labor, and the socio-politico-military-ideological means to sustain the above.
Also it was of course 95% agricultural wealth for Greece Rome Byzantium.
But oligarchic power is based on the process of creating a invulnerable rental stream, and increasing metropolitan RE values or immortal IP rights are likely a consequence of socio-political changes rather than a cause.
I haven't really seen much analysis on Rognile vs Piketty that has impressed me. Anywhere. Not that I really have it.
23: Right, but there's much more going on there than wages (networks, social capital, accumulated skill building that the rich find it easier to buy) - so looking only at wages won't be very informative. (Although looking only at nominal wealth won't show you everything either.)
The basketball player is any example of something like pure wage inequality with little of the other kinds involved (because high-income basketball players don't consistently cause their kids to be high-income basketball players).
The point is that this is why it's important to look at the non-wage components of inequality.
I think the depreciation claim is that Piketty assumes depreciation that matches historical average, while his critics claim that we should use contemporary depreciation averages. Current depreciation is higher, e.g. software is obsoleted in a few years where a industrial machine could last for decades. So higher gross capital income is offset by the higher cost of frequently replacing capital goods.
The claim in Piketty was that the huge gains in US-specific inequality were driven by wage inequality, largely driven by CEOs and wealthy financiers overpaying themselves. But wage-driven inequality for the 1% was largely a US and UK-specific trend. Elsewhere in the world, it combined with a global trend, which he saw in the past and saw as ever-more significant for the future, in which capital's share of the economy was growing and seemed likely to stay large for the foreseeable future, eventually growing larger still over the long term as the rate of return on wealth (capital) exceeded the overall growth rate of growth of the economy, creating an ever-increasing cycle of inequality unless broken by outside forces like war or taxation or both. That seemed to be happening in many economies now but Piketty conceded that the evidence for it was less well established for the present. He did claim that it was well established historically in slow-growth societies in the 19th Century.
The main critique of r>g from the economics establishment was that it was impossible/unlikely for r to in fact be >g in the long term, because (all things being equal -- oh hello there unrealistic economics amigo) the growth of capital would push down the return to capital and eventually increase the labor share of total national income. In fact that doesn't seem to have been the case historically for many economies for a long period of time but economists say whatever.
For me, whether the growth is in housing or otherwise in the current situation doesn't seem to me to matter that much, if you understand Piketty to be doing something slightly different than standard neoclassical economics -- he's explaining that political economies can get set up to provide high ongoing returns to capital in low-growth economies over the long term, and that will drive inequality. Cheaper housing (which could be produced through socialist buiilding and redistribution as well as goddamn Yglesias upzoning, though I'm generally supportive of upzoning I doubt it will be decisive) is likely part of the problem, but in the real world if housing gets less valuable it's super likely that wealth just gets moved somewhere else. Or gets circulated if at all through "labor" that means remuneration to a tiny number of members of the .01% club who are largely connected to one another and are "paid" for their "labor" in things like managing hedge funds or venture capital funds that they also own substantial portions of. I'm not competent to discuss the depreciation issue (or anything else, really) but it's so fudgeable that I'm also suspicious of it as a decisive factor; someone earning returns from a depreciating factory and with a depreciating house on land just strikes me as being in a fundamentally different position than those earning wage labor, both in an ordinary daily life sense and in a sense of who has actual social power. Though this pushes you in a Marxist direction, of course.
Shorter: unless you set up a political system to prevent inequality, if you don't have extremely strong economic growth, capital's gonna do what it's gonna do and the rich will find a way and create and sustain inequality.
Oh, and just to do my Carthago delenda est, once again -- there is no evidence that libertarian economic policies actually create economic growth. Say it loud, say it proud.
Piketty is still the most important recent resource, and during my reading I was more impressed with the hundred or so years he analyzes before the 1st Gilded Age, when the Napoleonic Bonds were another stable source of income and power for the 1%, and the hatred of inflation and labor power that era illustrated as an ideology.
Also reading Karen Wigan on transport competition (pack animals => trains) in and around the Iida domain (Shimoina prefect, Nagano) 1750-1920.
Marx, was if anything, way too much a Romantic who seems to have wildly overestimated the liberatory potential of industrial capitalism and technological dynamism (the depreciation freaks like Rognile belong there) and grossly underestimating the ability of elites to create and sustain rents.
Warren Buffet ...this article maybe sucks, about addiction to cheap fast foods mostly, but...
Last week, Buffett announced a plan to merge a number of 'food' companies in a deal he set up with Brazilian 3G Capital. For some reason, they all have German names (I'm not sure why that is or what it means, if anything): Heinz, Kraft, Oscar Mayer. Reuters last week summed up a few of the 'foods' involved:His move on Wednesday to inject Velveeta cheese, Jell-O, Lunchables, Oscar Mayer wieners, and Kool-Aid into his portfolio, stuffs an already amply supplied larder. The additions came from the acquisition of Kraft Foods Group Inc by H.J. Heinz Co, which is controlled by 3G Capital and Buffett's Berkshire Hathaway. His larder already included everything from Burger King's Triple Whopper burgers, Coca-Cola soft drinks and Tim Horton donuts to See's Candies and Dairy Queen icecream Blizzards, as well as such Heinz brands as Tomato Ketchup, Ore-Ida fries, bagel bites and T.G.I. Friday's mozzarella sticks.
But Buffett buying fucking everything is just awesome, huh?
I am trying to understand this world, which is badly served by modern economics. Heinz Ketchup is not valuable because of efficient production, I think. "Depreciation" is like saying of course the Heinz brandname and price-making position will decline over time, cause competition. It's science!
Heinz Ketchup is not valuable because of efficient production, I think.
Gladwell argued that they make good ketchup (or, at least, ketchup that is difficult to improve upon).
For Heinz, the critical flavor components--vinegar, salt, tomato I.D. (over-all tomato-ness), sweet, and bitter--were judged to be present in roughly equal concentrations, and those elements, in turn, were judged to be well blended. The World's Best, though, "had a completely different view, a different profile, from the Heinz," Chambers said. It had a much stronger hit of sweet aromatics--4.0 to 2.5--and outstripped Heinz on tomato I.D. by a resounding 9 to 5.5. But there was less salt, and no discernible vinegar. "The other comment from the panel was that these elements were really not blended at all," Chambers went on. "The World's Best product had really low amplitude." According to Joyce Buchholz, one of the panelists, when the group judged aftertaste, "it seemed like a certain flavor would hang over longer in the case of World's Best--that cooked-tomatoey flavor."
Ketchup sucks. Mustard is better.
Reminded me of this classic comment.
... For condiments, we bought a small jar of Grey Poupon mustard and a small jar of Hellman's mayonnaise for each limo and put them in the boxes with the sandwiches.
When we checked after it was all over with, we found that the Jewish limo had opened the mustard but not the mayo, and the non-Jewish limo had opened the mayo but not the mustard. Cultural differences: subtle but pervasive.
My understanding of Piketty is that his key contribution was explaining how the world has worked, and his theory gets more tenuous when he extends it into the future. The problem with his critics on depreciation is that their theory seems to have trouble when you extend it into the past.
Okay, maybe it works in practice, but it doesn't work in theory.
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Thank you cards from interns kind of creep me out. I mean, if we'd bonded over some difficult project where I'd done a lot of mentoring, maybe. But for a kid whose timesheets I signed and who did some very indifferent research for me -- not really a close working relationshop, the fact that she got me a card suggests that she's been indoctrinated with some very depressing ideals about how much interpersonal sucking up she's supposed to be doing with supervisors. Not that I'd hold it against her, but it makes me think the world is going to hell in a handbasket.
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It's kind of a thing in Chicago that they are anti-ketchup. Or maybe just anti-ketchup on hotdogs. What's that about?
I remember when Kerry was the Democratic nominee that the conservative blogosphere had lots of anti-Heinz Ketchup propaganda. Instapundt proved his integrity by standing up for the quality of Heinz.
I dutifully skimmed the Rognlie paper to say something meaningful here, only to find that 30 says almost everything worth saying.
On the depreciation issue: the accounting and tax notions of depreciation are distinct from the economic notion, even though they are of course related. The economic notion is supposed to be literally how much would it cost to buy the depreciated goods on the market today. Since this is not a number that actually exists, it has to be crudely approximated.
37: I have resumes in hand right now from people who talk, in vague terms, about what an excellent organization I work for. I promise you, they have never heard of my organization, nor do their cover letters show any sign of research into my company.
I, too, am not holding it against them.
37: With stuff like that, I can't tell if the world is going to hell in a handbasket, or if it's already there and youthful idealism prevented me from noticing sooner.
Hey, baby- if I told you you had an excellent organization, would you hold it against me?
I should add to 41 that these are resumes from entry-level types. I'd be less tolerant of fully realized grownups putting so little effort into trying to bullshit me.
Politicalfootball, you work for an excellent ah fuck it.
teo, have you any idea if "nushnik" is current in Alaska? It's the OED word of the day.
I've never heard it. What does it mean?
Russians don't have a word for "relief."
I remember when Kerry was the Democratic nominee that the conservative blogosphere had lots of anti-Heinz Ketchup propaganda.
Ah yes.... W Ketchup.
2004 was a weird time.