This 26-year-old grad

student didn't really

debunk Piketty, but
what he did do is just
as important
Updated by Matthew Yglesias on April 1, 2015, 9:00 a.m. ET

@mattyglesias matt@vox.com

YouTube

Has Thomas Piketty's famous book Capital in

the 21st
TWEET
Century been refuted by a 26-year-old graduate student?
Not really.
The student in question, Matt Rognlie of MIT, has published a
paper titled "Deciphering the Fall and Rise in the Net Capital
Share" ( http://www.brookings.edu/~/media/Projects
/BPEA/Spring-2015/2015a_rognlie.pdf?la=en) that adds
valuable depth and context to the discussion on wealth that
Piketty inaugurated. The paper's genesis is also a heck of a
good story, ably related by Jim Tankersley (
http://www.washingtonpost.com/blogs/wonkblog/wp/2015
/03/19/meet-the-26-year-old-whos-taking-on-thomaspikettys-ominous-warnings-about-inequality/); it will,
Tankersley notes, "almost certainly be the first paper at the
prestigious Brookings Papers on Economic Activity that was
commissioned based on a blog comment."
But the nexus of the good story, the heavy politicization of
Piketty, and the fact that almost nobody actually read
Piketty's best-selling book ( http://www.vox.com/2014/10
/15/6982747/piketty-igm) have also opened the doors to
confusion, and helped create a misimpression that Rognlie
debunked the book's core findings. He finds that Piketty got
some things wrong, sure, but hardly discredits the entire
argument.
Here's the quick version of what you need to know:

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Piketty's empirical finding that wealth inequality

has
TWEET
risen drastically is untouched.
Piketty's empirical finding that the capital share of
national income has risen (and the share going to
workers has fallen) is also untouched.
Rognlie finds that when you account for depreciation
properly, the capital share's increase has been less
dramatic than Piketty says.
Rognlie finds that when you account for depreciation
properly, the capital share's increase has been entirely
about housing.
Many economists are much less persuaded by Piketty's r
> g model and predictions of the future than they are by
his backward-looking empirical work.
Whether you endorse Piketty's policy prescriptions
continues to hinge overwhelmingly on issues that are
outside the scope of either his or Rognlie's work.
WATCH: 'How wealth inequality is dangerous for America'

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TWEET

Housing is central to the growing capital share of

income
For the past several years, there has been a lot of discussion
of the fact that wages and salaries paid to workers are a
declining share of overall GDP. Dylan Matthews reviewed
several leading theories ( http://www.vox.com/2015/1
/8/7511281/labor-share-income) on why this is happening
recently, including the growing use of robots, the decline of
labor unions, the rise of global trade, and other big concepts
people care about. Theory five on his list was that the
declining labor share is simply a question of bad statistics.
The issue here is depreciation. When a firm buys a computer,
the value of that purchase erodes with time. A $2,000
computer bought in 2012 is not worth $2,000 in 2014. When
you take that into account, business profits look less
impressive. Rognlie says this theory explains most but not all
of the apparent rise in the capital share:

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TWEET

Once you factor in depreciation, Rognlie finds that across a

range of developed countries the rise in the capital share of
income has been modest. What's more, it is entirely
accounted for by the housing sector rather than by the kind
of business investments factories, office buildings,
equipment, patents, etc. that put the capital in capitalism.

Does this mean Piketty has been refuted?

That really depends on what it is you mean by "Piketty."
Capital in the 21st Century is a long book, and it says a lot of
stuff. If your main takeaway from Piketty's book was, "Wealth
inequality has risen a lot back to preWorld War I levels
and I am alarmed about it," then there is really nothing in
Rognlie's research that would change your mind about it. This

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is what the vast majority of people who've talked

about
TWEET
"Piketty" over the past decade or so have meant. A line of
empirical research that Piketty pioneered with Emmanuel
Saez, and that has been continued by various collaborators,
shows that wealth inequality levels are higher than previously
realized, and generally rising.
In his book, however, Piketty adds to that research by
proposing that the future of inequality is likely to be
dominated by inherited wealth. This is tied to his view that
the rate of return on capital (r) is going to be higher than the
overall economic growth rate (g). Piketty shows that this has
been the case in the past, and then argues that it is likely to
be the case in the future. Rognlie's paper argues that r > g is
false for the non-housing sector, and thus challenges a
particularly striking claim of Piketty's, though likely not the
one that got a mass audience interested in his book.

Does housing count as capital?

Rognlie shows that capital income is on the rise "only if you
count housing," which is in some ways less profound than it
sounds. Capital is a term of art in certain kinds of
macroeconomic theory, and in that context it makes a lot of
sense to wonder about which kinds of things are really
capital.
But in his book, Piketty very clearly and expressly uses the
term capital ("le capital" in French) as an exact synonym for
wealth ("le patrimoine" in French).

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This was perhaps not a great idea, as it has tended

to get
TWEET
discussions of his work mired in the Cambridge Capital
Controversy ( http://www.vox.com/2014/5/8/5651676
/where-do-profits-come-from) and other obscure and
annoying corners of economics. But if you just say wealth
instead of capital, then obviously you have to count real
estate wealth as a form of wealth. If you were to inherit a
giant condo on Fifth Avenue and a beach house in the
Hamptons and a ski lodge in Colorado, you would become a
wealthy person.
What's more, as Guillaume Allgre and Xavier Timbeau show
( http://www.ofce.sciences-po.fr/pdf/briefings
/2015/briefing9.pdf), a general increase in real estate prices
leads to an increase in wealth inequality. This is true even
though (as Rognlie says) housing wealth is more broadly
owned than wealth in stocks and other financial assets.
Wealthy people own more expensive homes (and just more
homes, as in both vacation properties and rental properties),
so if the price of all homes doubles, the absolute wealth gap
between rich people and middle-class people grows.

Haven't lots of people besides Piketty talked about

the shifting balance of power between labor and
capital?
Yes. Rather than thinking of Rognlie as narrowly refuting
Piketty, which is misleading, it's better to say he's offering a
profound challenge to a much wider set of writings about
labor's declining clout in the modern economy.

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Rognlie's findings rather directly call into question

the
TWEET
relevance of a lot of punditry about the future of work in an
era of growing automation ( http://www.brookings.edu
/research/papers/2015/02/17-future-of-work-in-ageof-machine-kearney-hershbein-boddy). After all, nobody
thinks that there have been huge recent technological
advances in the realm of landlording. 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. Rather than robots, the problem is almost certainly
snob zoning rules that prevent the construction of new
affordable housing ( http://www.vox.com/2014/7
/15/5901041/nimbys-are-costing-the-us-economy-billions)
in expensive areas.

Could upzoning reduce wealth inequality?

Rognlie cites work by economists Ed Glaeser, Joseph Ryorko,
and Raven Saks ( http://www.nber.org/papers/w10124) to
argue that exclusionary zoning ( http://www.vox.com/cards
/affordable-housing-explained/exclusionary-zoning-what-isit-and-why-does-it-matter) practices have contributed
greatly to lack of housing affordability ( http://www.vox.com
/cards/affordable-housing-explained/supply-side-ofaffordable-housing-matters-most) and that this should be
more central to the wealth inequality debate. Lawrence
Summers ( http://www.democracyjournal.org/33/theinequality-puzzle.php?page=all), likewise, argued in a review
of Capital that "an easing of land-use restrictions that cause

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the real estate of the rich in major metropolitan

areas to
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keep rising in value" should be an important element of the
policy agenda to address Piketty's concerns.
When I interviewed him last year ( http://www.vox.com
/2014/4/24/5643780/who-is-thomas-piketty#interview),
Piketty indicated that he is open to a wide range of
complementary policies relating to housing and intellectual
property and other things, but doesn't regard any of that as
an ultimate substitute for progressive taxation.

Where does this leave Piketty's wealth tax idea?

It's doubtful that the technical issues around the return to
capital actually have much bearing on the merits of Piketty's
core policy proposal: the imposition of a small progressive
tax on net wealth.
The main criticisms of this idea are that it would be difficult
to implement and damaging to economic growth. The
question of whether taxes on capital income hurt investment
and economic growth is, as you would expect, subject to
controversy ( http://www.vox.com/2015/1/21/7863239
/taxes-investment-yagan), and really nothing about it hinges
on the housing capital versus other kinds of capital issue.
And of course, the very large practical implementation issues
around a comprehensive wealth tax are either solvable or
not solvable, regardless of Rognlie's points.
WATCH: 'President Obama on why income inequality has skyrocketed

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