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Piketty and The Perils of Asking the Wrong Question

5/31/2014

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I was at a party recently when the talk turned to Piketty. I brought up the point made by several commentators that if the rich consume rather than reinvest their wealth, inequality won't grow as fast as Piketty claims. After I laid out the argument, it struck me that this point was entirely correct and entirely misleading. That's because the whole debate is about the wrong question and it's easy to get lost.

The focus on inequality makes it seem like it's a good thing if rich people consume rather than save their wealth because that would reduce inequality. But focus on poverty and you reach the opposite conclusion. If the rich save more, there will be more capital in the future, which leads to higher wages (because labor becomes scarce relative to capital), which leads to higher incomes for the poor and the middle class (because wages constitute most of their incomes). In other words, if the rich save more and accumulate more capital, the poor and the middle classes will be better off because of it. That it will also increase wealth inequality seems quite beside the point.

Ask the wrong question
(how can we reduce inequality?) and you get the wrong answer (encourage the rich to save less and consume more).

Ask the right question (how can we reduce poverty?) and you get the right answer (encourage the rich to consume less and save more).

UPDATE 6/2/2014: Andrew Biggs made the same point here earlier.
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Do College Grads Play Better Football?

5/21/2014

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WSJ has a fascinating article on how NFL players that have completed college seem to play better. It's a big part of the Philadelphia Eagles strategy:
Armed with science and a bit of logic, the Eagles have quietly scoured the college ranks for something that has little to do with 40-yard dash times or bench-press abilities. They want players who have earned college degrees.

"When you look at people who are successful in any profession, it always goes back to college graduates," said Eagles general manager Howie Roseman. "We found NFL players are no different."
Eagles Coach Chip Kelly believes completing college is a sign of commitment and grit:
Kelly said a degree is more than proof of intelligence. "It's also, what is their commitment?" he said. "They set goals out for themselves and can they follow through for it? A lot of people can tell you they want to do this, this and this. But look at their accomplishments."

The Eagles say they want players who are prepared, and a degree confirms that. Take wide receiver Jordan Matthews, a Vanderbilt economics major whose study habits translated perfectly to the NFL.

Before meeting with the Eagles ahead of the draft, Matthews slipped into Vanderbilt's film room and watched a few Eagles games from last season—which he did with every team he met. Matthews was able to have an informed conversation with Kelly about the intricacies of his offense, something seldom done in the slog of pre-draft interviews, where some players meet with dozens of teams. The study habits paid off: The Eagles took Matthews in the second round.

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How the Rich Got Rich: Boudreaux vs. Piketty

5/9/2014

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Don Boudreaux, Professor of Economics at George Mason University, responds to a correspondent regarding Piketty's book:
... [Let] me ask you to look at the most recent (September 2013) Forbes list of the 400 wealthiest Americans.  From Bill Gates at the top to Nicholas Woodman at the bottom, all are billionaires.  Yet 261 of these people are self-made.

That is, nearly two-thirds earned their fortunes through creative entrepreneurial effort and risk-taking - people such as Amazon.com’s Jeff Bezos, Google’s Sergey Brin and Larry Page, Facebook’s Mark Zuckerberg, eBay’s Pierre Omidyar, and entertainer Oprah Winfrey.  These people’s efforts enrich not only themselves but also you, me, and hundreds of millions of other people.  I’m aware that Piketty dismisses such claims as being crude apologetics, but I challenge you – and him – to explain how, say, Chick-fil-A founder S. Truett Cathy amassed a large fortune if the countless people who voluntarily dine at his restaurants do not benefit from doing so.
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    Ben Mathew

    Author of Economics: The Remarkable Story of How the Economy Works

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