Wednesday, April 23, 2014

Robert Solow Provides The Best Summary Of Piketty's Book

Robert Solow is a Nobel Laureate who achieved fame by developing the Solow model of economic growth.  Piketty used the Solow growth model to describe the history of economic growth, and to forecast future growth.  The economic growth rate is central to Piketty's explication because inequality is a function of the relationship between economic growth (r) and the the rate of return on capital (g).  When the return on capital (g) rises relative to (r), capital income rises as a share of national income.  Since capital ownership is highly concentrated, inequality must increase as a result.

Solow carefully analyzes Piketty's thesis , and he describes the assumptions upon which it rests. He then tests the assumptions, and he offers his views on how they hold together.  By and large, he gives the nod to Piketty.  He disagrees a bit with Piketty about the solution to the problem that he describes.  Piketty argues that a modest progressive tax on wealth, which lowers the ratio of (g) to (r), will reduce the growth on inequality.  Since the wealthy will use tax havens if they are easily available, it is necessary to have regional policies that will limit the use of tax havens.  Solow thinks that this might work in Europe, but that it won't work in the US.  He thinks that it might be easier to restore the inheritance tax in the US, and to increase the progressiveness of the tax system.  In other words, we only have to repeal the changes that Reagan and Bush made to the tax code.  The rise in inequality in the US was made in Washington.  It can be unmade in Washington if we have the political will.

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