The Corner

Thomas Piketty’s Housing Problem

Last week, Tyler Cowen and I had a piece over at the Upshot looking at some of the reasons why French economist Thomas Piketty’s book, Capital in the Twenty-First Century, didn’t get the same reception in France and in the United States. While the French liked the book, they didn’t treat it as the best book ever written or the most important book of the century. Meanwhile, during Piketty’s visit to the U.S. he became the Mick Jagger of capital-to-income ratios almost overnight — he was called an “rock star economist” by a New York magazine writer who joined him “on tour.”  A smartly dressed, Balzac- and Tarantino-quoting French economist will always have a certain appeal for culture-conscious Americans and their Francophilia.

Patrick wrote about out our piece last week here highlighting why the French, unlike the Americans, didn’t “freak out about the book,” but one of the substantive issues we raised is particularly important.

French economists have had more time to digest Piketty’s prose — he has been a staple of the political and academic landscape in France for many years — and they’ve taken the lead in challenging Mr. Piketty’s empirical claims. We mentioned one recent paper in particular: the work of four economists at l’Institut d’Etudes Politiques de Paris, Odran Bonnet, Pierre-Henri Bono, Guillaume Chapelle and Etienne Wasmer, which offers a serious challenge to Mr. Piketty’s view that inequality has increased because the return to capital has been greater than general growth in the economy.

As we noted at the Upshot, “The paper argues that the higher growth of capital rests entirely on returns to housing, and takes technical issues with the book’s treatment of housing, too. If Mr. Piketty’s argument depends on housing, it hardly seems to match his basic story about the ongoing ascendancy of capitalists.” Well, this morning I find out that the paper has been translated into English, so you can now read it yourself.  

The three important points the authors make: 

First, the author’s result is based on the rise of only one of the components of capital, namely housing capital,and due to housing prices. In fact, housing prices have risen faster than rent and income in many countries.It is worth noting that “productive” capital, excluding housing, has only risen weakly relative to income over the last few decades. Over the longer run, the “productive” capital/income ratio has not increased at all.

Second, rent, not housing prices, should matter for the dynamics of wealth inequality, because rent represents both the actual income of housing capital for landlords and the dwelling costs saved by “owner-occupiers” (people living in their own houses). Logically, to properly measure capital, the value of housing capital must be corrected by measuring it on actual rental price, and not housing prices.

Third, when we apply this change, we find that the capital/income ratio is actually stable or only mildly higher in the countries analyzed (France, the US, the UK, and Canada) except for Germany where it rose. These conclusions are exactly opposite to those found by Thomas Piketty. However, this does not mean that housing prices do not contribute to other forms of inequality. When housing prices rise, owners of the housing capital hold a higher value that can be transformed into consumption. It is also more difficult for young adults to become homeowners. Housing incomes of owners however do not necessarily increase which casts serious doubt on Piketty’s conclusion of a potential explosive dynamics of inequality based on these trends.

The whole thing is here and it is very much worth reading. 

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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