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I swear my post on rents is coming soon! In the meantime, think about the implications of the big Picketty assumption/finding that the rate of return on capital going forward will exceed the average rate of economic growth. And assume that we actually understand what this means – do read all of the book reviews that have come out. In any case:

  1. The rate of return on capital is VERY closely related to the use of a discount rate in doing present value analysis. If what Picketty claims is true, what does this imply about what the “true” social cost of carbon is in his world? In other words, when you hear us say things like, “The IPCC finds that the social cost of a ton of CO2 is $30 per ton” this is the conclusion of a present value calculation of the external costs of carbon over the next X years, where X is typically out until 2100. So, if Picketty’s claim is that r is “relatively high” then wouldn’t this imply that ??? Well, you get the picture.
  2. Second, if Picketty is correct that we are stagnating, as embodied by his “g” being smaller than “r”, then how would the IPCC high emissions scenarios ever materialize? Remember, the doomsday scenarios, and I do recommend you read the reports, are coming from the assumption that global GDP will increase rather impressively over the next century. In fact, given that today’s global GDP (PPP terms) is roughly $85 trillion, assuming even 3% annual global GDP growth implies that by the year 2100, global GDP will be … $1.1 QUADRILLION . That is not a typo. If we assume 2% growth rates, then global GDP will be only $467 trillion by then. The IPCC “business as usual” scenario (i.e. FASTER growth than Picketty) is assuming roughly $5 trillion in Global CO2 damages by the year 2100. So, $5 trillion sounds like a lot (see page 12 of this paper, which is not exactly coming from a “denier”). It is still only 1.1% of global GDP under the low growth scenario, which I argue is still higher growth than Picketty thinks we’ll get. But the $5 trillion of damages is itself assuming more growth than Picketty suggests we’ll get.

You do the math. So, totally aside from the implications of Picketty’s stories on privatizing social security, I think there are really interesting climate impacts. I am sure they will make front page news and for big sections of future book reviews.

2 Responses to “Picketty and Climate Change”

  1. Harry says:

    We deniers have done the math, and it does not add up, at least for me.

    I used to use the Value Line Investment Survey as a source for investment analysis. I found it to be valuable. One, however, had to be aware of the assumptions used by the analysts who spoke their predictions of future earnings, which often were better than the predictions of the research from brokers that flooded my desk. At least Value Line published their assumptions.

    Value Line always had a statistical section about pension obligations, leases, and interest coverage, three subjects which is not at the lips of your average stockbroker who might be selling junk bonds; recently my broker (trader) said, when I asked him about interest coverage said, “The stock price is 26,” as if that was the answer to my question.

    So there is a lot of ignorance out there, even among financial professionals, who rely on their CFA’s to produce the research, using their assumptions about the discount rate, to generate trades to swap Merck for Pfizer, or the other way around. At some point a United Nation economist cites a consensus between what Morgan Stanley economists and Goldman economists, whatever works for their conclusion, about what interest rates will be for the next six months, and viola! We do a a ninety-year projection. By the way, few of these analysts would foolishly hazard to say that any economy will grow when it is slowing.

  2. Harry says:

    Do I really have to read the book, WC? I know it is the rage, but you plowed through it, because that is your academic job. I think, after I finish a few trashy mystery novels, I should drag my Bastiat books out, or Copleston , who gives me a survey of Hegel without having to learn German to read Hegel. Or, better, take out The Road to Serfdom.Or read Speedmaster’s links on pens, watches. cars, pictures, Don Boudreaux, etc. We rely on you and others to give us a synopsis of loopy French economists.

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