Piketty’s Treatment of Housing as Capital Is not an Excuse to Ignore His Predictions

Thomas Piketty’s “Capital in the 21^st Century” is clear from the beginning: housing and real estate generally ought to be included in the definition of “capital” for the book’s purpose, since the point is to examine the aggregate effect of accumulated wealth that produces an annual return through no effort on the part of its owner. A whole set of Piketty “rebuttals” attacks (opens in a new tab) that treatment.

• Lawrence Summers claims (opens in a new tab) that housing price dynamics—namely, the housing bubble and eventual firesale in the 2000s—are driven by supply restrictions and inelastic demand, not capital accumulation.
• Kevin Hassett at the American Enterprise Institute says (opens in a new tab) that since you can’t replace workers by houses in production, workers aren’t threatened by the wealth accumulation Piketty emphasizes, since that wealth is attributable in large part to housing.
• A group of economists (opens in a new tab) at the Institute for Political Studies in Paris points out that a large portion of the increase in the value of capital—and in France, all of it—is due to housing appreciation, which they argue is sensitive to the decision to value it using market prices rather than the market rental stream. That critique was trumpeted (opens in a new tab) by Tyler Cowen and Veronique de Rugy, and then enlarged upon in a more recent paper (opens in a new tab) by Matt Rognlie, an economist at the Massachusetts Institute of Technology.

My recent column (opens in a new tab) shows why those attacks fail, and why they reflect a larger reluctance on the part of macroeconomic theorists to confront the empirical failings of their received wisdom. Economists have developed a relatively sophisticated understanding of how the value of housing is determined, including by politics. “Capital in the 21^st Century” doesn’t explore all of those findings, but they are nonetheless consistent with the book’s main arguments.

In short, the housing-based critique of Piketty’s book is not what its proponents have been desperately looking for—an excuse to throw Piketty’s data, theory, and predictions away.