Piketty’s rising share of capital income and the US housing market

Could that decline also be due to new home owners who are purchasing at high prices (due to cheap debt) are finding that they aren't making anywhere near as much from renting those places out because the expense ate up their margins?

Regarding stock market returns, I'm curious if the calculated returns on stocks as a class properly takes into account failed companies. Take the FTSE 100. If a mid-tier one of those companies fails (Lehman's collapse for example) the FTSE 100 doesn't lose 1% of it's value. Instead the 101st most valuable UK company takes it's place. Does anybody know how well measures of stock market returns take into account effects like this? Or are they measured on the total market value of all traded equities?

Housing is also a market where people can get very involved in the local government to prevent additional supply from being brought on line, despite soaring demand, mostly via zoning. Look at places like Palo Alto and Boulder.

Huh? That's not what this research is about at all.

Is this not the intention of the monetary policy? To stimulate spending now rather than later.

I could see the harmful effects this could cause when used as a long-term solution. Such as the recent extended US policy since the recession. Pushing people to make purchases doesn't help them rise out of the income bracket. Is this a known factor in contributing to the income divide?

I don't follow; the rent/imputed rent/price of a house is based more on the prices of the houses around it than on the improvements made to the house itself. Mark Zuckerberg excepted, most people don't spend on luxuries by buying up the neighborhood. I also don't follow how the relatively cheap price of debt leads to discouraging productive investment (unless you mean that it encourages risky investment).

In the long run, this seems to be partly due to Henry George theorem (https://en.wikipedia.org/wiki/Henry_George_theorem). Otherwise real estate wouldn't be that exceptional than other asset classes, as the article suggests.

There seems to be a need to clarify and expand on nickff's comment, so let me give it a shot. ...

Lower interest rates mean that lower-return, less productive investments may attract capital (savings) that, all else equal, would be captured by higher-return uses if interest rates were higher.

For example, suppose I run a factory that has an opportunity to invest $1MM in new machinery to increase productive efficiency, resulting in 2% higher profits. Meanwhile, you run a factory that would benefit similarly from a $1MM investment, but to the result of a 5% increase in profits (from the same level). If prevailing interest rates for investments with a similar risk profile to ours are 4%, then since 4% > 2%, there is no interest rate at which I can issue bonds (or get a bank loan) such that (a) somebody would be willing to buy those bonds in preference to other similarly risky bonds (or give me a loan in preference to other similarly risky borrowers), while at the same time (b) I would be able to make a profit by taking their cash and investing it in new machinery in my factory. The result is that my investment does not get funded–indeed, knowing that investors will demand 4% and that I can offer at most 2%, I will not even ask for their money. On the other hand, in the same macroeconomic environment you can profitably attract capital to your factory, because you can sell bonds to willing buyers at 4% and use the money to fund an investment that will gain you 5%. And so do ask for funds, and you do get funded; and others in a situation similar to yours do too, while I and others like me don't. So broadly, throughout the economy as a whole, each dollar invested results in productive growth of at least 4%, after controlling for risk.

Now imagine that the situation in our factories is the same as before, but that interest rates are only 1%. You can still issue bonds, of course, but now so can I. And if we do both issue bonds, the result is that the average economic return on investment is lower: my 2% productive gain and others like it bring down the average. If capital markets are functioning well, there's nothing wrong with that. Interest rates should be lower in the latter situation because there's more cash that people are trying to put into productive uses; the most productive uses should still most easily attract dollars, so all of the investments returning 4% that were available before should still get funded; only afterwards should the leftover cash flow to less productive investments like the one in my factory.

But in reality there are many reasons to think that broadly lower interest rates might result in capital being allocated to less productive uses at the expense of more productive ones. First, investors cannot always easily distinguish between more and less productive investments. Things usually tend to work out all right in part because borrowers only have an incentive to borrow if they believe they can profitably make use of borrowed dollars; but less productive borrowers can turn a profit at lower interest rates, so if lenders can't distinguish them from their more productive competitors for borrowed dollars, then the macroeconomic return to investment will fall as less productive investments partially crowd out more productive ones. Second, investment competes with consumption, which is unproductive by definition. People will forgo spending cash today only if they're promised so much more tomorrow that it seems worth the wait; when interest rates are low, people will spend more money today on non-productive uses (consumption) than they would if interest rates were higher.

Well-functioning capital markets should sort it all out. But it's not at all clear that we have well-functioning capital markets. Some of the potential reasons for that are well mooted; another class of reasons has to do with the fact that out capital markets are subject to massive manipulation by central bankers. Interest rates today are not extraordinarily low because lots of people are willing to forgo spending today in exchange for a pittance more tomorrow; interest rates are near zero because central banks have created a whole lot of money out of nothing, and that cash has to go somewhere. Indeed, this is a major reason that mainstream monetary theory says you should lower interest rates during a recession: by doing so, you jump-start the economy by enticing people to spend money now that they otherwise would have waited to spend until tomorrow—but that's essentially because you've made money tomorrow worth less than it would have been otherwise, not because you've made money today worth more.

So at the same time, you're also probably shrinking future economic growth. And there's not much reason to think that all these crisp, newly minted dollars are flowing to the most productive uses. Indeed, much of that money (by design) has gone to shoring up the balance sheets of big banks, mainly by inflating the value of government-issued bonds (thus lowering broad interest rates) and other assets—including houses.

>investors have been discouraged from investing in productive assets and investment vehicles by the low interest rates

Not really. They've been discouraged from investing in productive assets because of anemic demand - caused in turn by high income and wealth inequality.

No point in building another factory if the people who would purchase its output are stuggling to pay down student loans, rent and spending the little disposable income they do have on an iPhone.

The Financial Times analysis has already been found to fraudulent, with skewed accusations so that they can push their own worldview:

http://www.economist.com/blogs/freeexchange/2014/05/thomas-p...

> But increasingly the battle seems to be one over methodological choices and data interpretation rather than major data errors or fabrications, as the initial FT work suggested.

You use the word fraudulent too lightly.