Coppola Comment

In my last post , I placed into a sectoral balances framework Piketty's argument that rising US inequality drove the financial crisis. This is not to say, as some do, that excessive savings from China fed directly through into excessive household debt in the US. If only it were that simple. My argument is that trade dynamics between the two countries fed a capital surplus in the US, which inevitably found its way into higher household borrowing because of a relatively tight fiscal position and a sustained surplus in the corporate sector.  Various people have criticised this on the grounds that it is not microfounded. Philip Booth of the IEA , probably my severest critic, says is "not economics". I think this is a somewhat narrow definition of "economics": just because I have not given a microeconomic explanation for a macroeconomic argument doesn't mean the macroeconomics is wrong. But we do need a human explanation for the high borrowing of low-to-middle

Ryan Bourne complains that my takedown of Sumner didn't actually address Sumner's main criticism of Piketty. Indeed, that is is a fair complaint. I was so busy disagreeing with Sumner that I failed to explain Piketty. So I shall remedy the oversight now. Here's the paragraph from Piketty that Sumner critiqued: "In my view, there is absolutely no doubt that the increase of inequality in United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms." This paragraph does need some explanatio