Marketplace of Ideas
- The Financial Times stoked the flames of Piketty mania last Friday with a detailed article charging the French economist with using shady data. Piketty’s Capital in the 21st Century—which quickly sold out the first print edition in English—draws on hundreds of years of data to make the case that big declines in income and wealth inequality in the mid-twentieth century were aberrations in the history of capitalism. Piketty argues that capitalist systems tend to generate wealth inequality over time, and if people dislike that outcome they should legislate policies to counteract it. The FT critique has sparked a storm of responses, from Piketty himself as well as a number of commentators and influential economists. While the likes of Paul Krugman and Justin Wolfers agree that there are errors in the nearly 700-page tome, they say those errors are not critical. “Anyone imagining that the whole notion of rising wealth inequality has been refuted is almost surely going to be disappointed,” says Krugman, citing previous studies that back up Piketty’s claims. You might notice a political slant here, but even Forbes, which has been critical of Piketty, says the FT is blowing the issues out of proportion. If you care to form your own opinion, you can pick up a copy of Capital and read it for yourself. Piketty has also made all his data available for free online.
- Everybody’s talking about Cuba, says Marketplace. That’s because the U.S. Chamber of Commerce led a delegation there this week, as pressures mount on the Obama administration to ease longstanding sanctions against the communist country. Bloomberg says the political consensus in Washington against trade with Cuba is cracking, as U.S. businesses seek opportunities to expand their markets overseas. But Florida Senator Marco Rubio, whose parents are Cuban immigrants, calls the Chamber of Commerce trip “misguided and fraught with peril.” The large Cuban community in the U.S. is politically active and adamantly opposed to closer ties with the Castro regime. Richard Feinberg, a professor of political science at UC San Diego, says a loosening of sanctions could help speed up reforms in Cuba, but the Obama administration has to “be willing to take little political heat.”
- You may have heard about the “new normal” for the U.S. economy, but what about the “new neutral”? According to the Economist, “The new normal idea was that economic growth will be sluggish; the new neutral concept is that, in response, interest rates will stay low.” That bet is being promoted by Bill Gross, head of fixed-income giant Pimco. Despite continued gains in employment and signs that the economy is heating up after a winter lull—revised figures this week show the economy shrank in Q1—Pimco is betting that interest rates will stay much lower than the Fed expects. But Pimco hasn’t done so well lately, and competitors Goldman Sacs, J.P. Morgan Chase, and Blackrock are all betting the other way. While the Fed admits that rates are likely to stay lower than what was previously considered normal for a while, remember what happened last year at this time when the market was in denial about Fed tapering: 10-year Treasury yields rose a little over 1 percent in just a little more than two months. That caused mortgage rates to shoot up, cooling off the housing market.
- Finally, according to an NPR story this week, “One of the toughest money decisions Americans face as they age is whether to buy long-term care insurance.” The Wall Street Journal cites research showing that 70 percent of people aged 65 and older will need some form of long-term care. Signing up before health problems set in will make it easier to get coverage, but many people don’t want to—or can’t afford to—commit to the expense so early. Financial Advisor magazine says long-term care insurance is mostly for people looking to preserve wealth for future generations rather than spend it all on health care. For those without the wealth or insurance to pay for long-term care, Medicare typically doesn’t cover it, and Medicaid will only cover nursing home costs.
[Photo: Bloomberg Businessweek]