Author Archives: James_Hamilton

Negative interest rates

The European Central Bank announced on Thursday that it is moving interest rates into negative territory, charging banks for maintaining deposits with the ECB rather than paying the banks positive interest. The hope is that lower (now even negative) interest rates may provide some stimulus to the European economy which might help bring European inflation closer to the ECB’s 2% target. Here I offer a few thoughts on this move.

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Educating Brad DeLong

Brad DeLong writes:

Department of “Huh?!”–I Don’t Understand More and More of Piketty’s Critics: Per Krusell and Tony Smith

As time passes, it seems to me that a larger and larger fraction of Piketty’s critics are making arguments that really make no sense at all– that I really do not understand how people can believe them, or why anybody would think that anybody else would believe them. Today we have Per Krusell and Tony Smith assuming that the economy-wide capital depreciation rate δ is not 0.03 or 0.05 but 0.1–and it does make a huge difference.

Let me do my best to try to educate Brad.

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More on Piketty

I continue to agree with Paul Krugman that the Financial Times and Tyler Cowen have picked an unlikely battle with Thomas Piketty in trying to claim that wealth inequality in the United Kingdom has been decreasing rather than increasing over the last 40 years; more on this from Carter Price. As for Piketty’s broader claims of century-long trends (to perceive which the French scholar has to dismiss much of the twentieth century as an anomaly), King Banaian’s summary of some of the details in how Piketty misreported the data are troubling.

The core claim of Piketty’s book is that slower economic growth will lead to a huge increase in the capital/income ratio as a consequence of a relation that Piketty described as the “second fundamental law of capitalism”. I earlier explained why Piketty’s law is complete nonsense. Separately, James Galbraith explains why the first “law” as interpreted and applied by Piketty is also highly problematic.

Many of us believe that relatively recent globalization, rather than Piketty’s broad theories or asserted sweeping historical trends, played an important role in growing income inequality within most major developed countries over the last generation. But it should also be noted that this same globalization has also been the key factor in reducing inequality on a global scale in the sense of profoundly raising the standard of living for billions of residents of developing and emerging economies.

UPDATE: I see that Per Krussel and Tony Smith came out with a paper today elaborating on the points I made on Sunday. Hat tips to Greg Mankiw and Tyler Cowen.