Both Robert Gordon’s and Thomas Piketty’s work, after drawing upon wide ranging examples and data offer somewhat pessimistic assessments of the future of economic growth, but for different reasons. Explain these differences and any views that they expressed in the videos about possible policy responses.
Robert Gordon argues that economic growth is almost over and will be 0.8% per capita because of “Headwinds” which are demographics, education, debt, and inequality. First of all, labor forces are declining because baby boomers start to retire and prime age adult males drop out. Second, education will be “Headwind” because education costs have become inflation. College completion rate in the US is 15% below than Canada. Also, a lot of students have student debt. Third, the US has a lot of debt. Consumers paying off is one of main reasons why economic recover today is so slow. At the same time, federal government debt is increasing rapidly as a share of GDP. Only solution for the debt is either some combination of faster growth in taxes or slower growth in entitlement. Finally, the US has higher inequality. Growth rate of bottom 99% of income distribution is slower than top 1%. Therefore, he claims that economic growth will be much smaller than the last century.
Piketty insists that rate of return of capital (r) is greater than economic growth rate (g) in the long run (r>g). This causes the inequality as a result of the concentration of wealth. Wealth inequality was less extreme than the century ago. For example, income inequality was higher in Europe in 1900 than now in the US. Also, quantity of wealth recovered from the war shock during 1910-1945. However, it became higher in the US than in the Europe. Piketty explained the main factors causing this change were changing supply and demand for skills, race, and globalization. In short, wealth inequality expands faster because the equilibrium level of wealth inequality increases when r>g is bigger. Piketty has a pessimistic opinion of the future of economic growth because population is supposed to decline in the future. Although wealth concentrate to the capitalists and they did not invest their wealth a lot, supply will increase as long as population increase. . In fact, there were 5% economic growth rate in Germany, in France, in Japan between 1950 and 1980 because of higher demographic growth. However, Piketty warns what will happen in the future of economic growth when population growth stops.
Robert Gordon suggested that only innovation of technology can overcome “Headwinds” and increase the economic growth. Piketty proposed that financial transparency, international transmission of bank information, global registry of financial assets, global coordination on wealth taxation, progressive wealth tax rates. In particular, financial transparency and international transmission of bank information can provide information and enable the policymakers to adapt the policy.
Gordon mentions more about human capital while Piketty does not include the concept of human capital in his theory. In Solow model, it considers labor stock, capital stock, national products, and level of technology. In Gordon’s video, changes in demographics and education can regard as capital stock and labor stock. Productivity plays an important role for economic growth in the Solow’s model as a result of technological progress, therefore Gordon asked to the audience at the end of the video “Can you match what we achieved?” This is implying that Gordon presupposes that innovation will not happen as great as the one invented by the inventers of the 20th century. Hence, policy makers are ought to reduce the level of “Headwinds” and encourage inventers, which means that there are possible policy implications in the field of education.
Compare with Gordon, Piketty has more pessimistic opinion that he thinks economic growth does not last for long time. Piketty does not mention human capital, but it strongly relates to Solow model as well. Although Piketty found r>g in the long-run problem by using practical and historical data, Solow growth model shows that the condition r>g is familiar to economist. Mankiw (2015) refutes Pikkety that “If the rate of return is less than the growth rate, the economy has accumulated an excessive amount of capital.” However, Piketty claim that r>g is problem because economic nationality can effect democratic and meritocratic nationality. Piketty suggests financial transparency, international transmission of bank information, global registry of financial assets, global coordination on wealth taxation, progressive wealth tax rates to reduce the wealth inequality because he thinks that economic growth does not last for long time. in particular, these policies are more important for developing countries in order to stop increasing the wealth inequality because od the gap of r>g.
References
Mankiw, N. Gregory. 2015. “Yes, r > g. So What?.” American Economic Review 105, no. 5: 43-47. EconLit with Full Text, EBSCOhost.