I certainly wouldn’t lay it at the hands of fractional reserve banking – but as a story of evolving expectations of bailouts, or gradual investment by financial intermediaries to make themselves ‘too big to fail’ there is some plausibility. Only enough plausibility to tell me it is a hypothesis worth investigating though – certainly not one that tells me we should set policy based on it!

Agreed regarding NZ data, the K/Y ratios look pretty stable but without land this is a bit empty. I am hoping that Piketty motivates someone in NZ to do this sort of research – I am being sort of selfish as I have just started research on the personal income distribution, and having someone else do this more macro story would really help me improve my own narrative 🙂

My broader point here (if I had written the post a bit better) is that there are alternative explanations to the data Piketty put together, explanations that don’t rely on either an elasticity of substitution in net factors of more than 1 or real rates of return being macrosocial. In that light his text tells us we should really look deeply into the causes, then consider policy – however, he merely calls it a natural tendency of capitalism and suggests a capital tax which from my reading is a long bow to draw (even though I have some inherent sympathy for the view, especially if we expect technology to be increasingly labour saving).

Piketty touches on a lot of mechanisms that could drive policy – which is fair enough, he is trying to express a data set that is showing an increasing concentration of wealth.

However, if it is to do with financial regulation rather than an inherent tendency it changes both the forecast of what will happen and what “best” policy is. Combined with the fact there is already pressures to remove implicit subsides (the OBR in New Zealand can be seen as an example of this – although one that also illustrates some of the pitfalls), this suggests that focus here makes significantly more sense than a tax on the value of capital.

Remember, the capital tax was justified on the basis of increasing wealth concentration – if it is due to regulation in this sense the increasing wealth concentration in the future doesn’t follow!

The key thing is that Piketty would view our view (as I share your view here), that financial regulation and implicit views on government appropriation, are the dominant drivers as wrong. This is why there needs to be work “comparing hypotheses” before we can come to policy conclusions!

Changing the rules of the game is hard but not harder than implementing a global wealth tax. Better to tackle a problem head on than introduce a Rube Goldberg solution, if we have the choice. And in countries with a free press we have seen a little pegging back of the implicit subsidy. What is democracy for if not this?

Imagine an imaginary island which has not so much Capital but is rich in bounteous Land. Imagine the rulers of this island had passed so many regulations regarding Land and the non-taxation thereof that it amounted to a vast implicit subsidy. And it so disenfranchised the youth of this island that they had to take on vast debts just to acquire enough land to live on. Would it be better to dismantled some of the regulations? Or to create a giant Tool to stop the young people trying to buy more Land?