King's Landing riot

How inequality hurts a society.

King's Landing riot.

Suresh Naidu on Piketty

Weekend Reading: IMHO, Suresh Naidu Has the Best Review of Piketty: Capital Eats the World, from Jacobin by DeLong

In their essay last fall on the state of economics, Seth Ackerman and Mike Beggs charged that today’s mainstream is irredeemably captured by conservative ideology. The good news is they’re wrong — Piketty’s work testifies to that.

Contemporary mainstream economics is a politically broad tent, and has a lot to contribute to economic analysis. But it needs to be struggled with, as many have in the debate surrounding Capital in the Twenty-First Century.

Every economics student learns the ‘Kaldor facts’ of economic growth. One of these is that the share of national income going to capital has a long-run tendency to stay constant.

Heterodox economists have been pushing against this stylized fact for a decade, and finally mainstream economists are recognizing and documenting that far from being constant, the capital share has in fact increased around the world. A noted paper by Lukas Karabarbounis and Brent Neiman documented this in the corporate sector around the world, while Francisco Rodriguez and Arjun Jayadev show it for global manufacturing.

Two explanations for this phenomenon typically thrown around by economists are ‘trade and technology’: the global supply of labor has increased relative to capital, and technological changes have lowered the price of capital and increased the substitutability of capital and labor. Another explanation, of course, is political, with right-wing ideology and policy ideas diffusing around the world alongside the Great Right Turn and the demise of the Soviet Union.

Piketty suggests that the rise is a long-term structural trend – the outcome of decelerating population and productivity growth coupled with a profit rate (r) that stays steady. But what keeps r high? Piketty never explicitly says. This question is at the heart of the struggle over how to interpret his book.

The neoclassical approach would be to examine three sets of forces in the market for capital that could account for it: supply, demand, and taxes. The supply of capital is given by the savings rate, and one important idea in Piketty is that the taste for savings at the top looks little like the frugal ant saving in order to consume for the future, the conceit of optimal growth theory. Instead, he suggests that a better way to think about savings is through models where accumulation and the building of estates are ends in themselves.

Piketty and others have been exploring these kinds of models in academic papers, where multiplicative shocks to capital accumulation — random fluctuations in tastes, lifespans, fertility and investment opportunities — generate a skewed distribution of wealth. ‘Accumulate! Accumulate! That is Moses and the prophets,’ ran a memorable line from Marx.

If it is an accurate description of the capitalist drive to invest and save, then the forces that drive the wealthy to accumulate might not just be the realization of future consumption, but instead an insatiable drive for security, sociological pressures, psychological fantasies of future empires, or other structural imperatives.

When you start thinking of savings this way, the case for taxing capital becomes much clearer. If the supply of capital is more like immobile real estate and less like footloose cash, basic economics suggests that we can tax it, because it won’t disappear, and you might even be doing some social good.

If people are saving to pass inheritances onto their kids, then the cost of taxing capital is depriving some of trust funds, not a comfortable retirement. Not only does it mean that certain standard theories saying optimal capital taxation is zero don’t hold up anymore. It also means that one-off re-distributions of assets won’t stay equal for long, so some kind of permanent capital tax is needed.

Piketty suggests a fruitful research agenda here. Once freed from the consumption Euler equation, the ‘frugal ant’ view of saving, what theory of private sector savings do we need to best understand inequality and growth? The question about how to tax capital becomes less about the trade-off between savings and consumption, and more about how to implement global taxes to keep capitalists from taking their money offshore.

The other blade of the scissors determining r is the demand for capital. Piketty makes the argument that r is likely to stay higher than g because capital and labor are becoming more substitutable, which could be read as the incoming future of robot capitalism as well as increased trade with labor-intensive countries.

The upshot is that even though capital will keep accumulating, the rate of profit will not fall much because we can keep substituting out workers with it. Peter Frase’s ‘Four Futures‘ captured this well; in one of the futures, an abundant, narrowly owned capital stock resulted in relatively low wages for everyone despite high output.

But we have heard this before. Consider the development of the tractor, which mechanized virtually all of agriculture over the 20th century. Somehow new desires and demands sprung up for new kinds of manufactured goods, many of pure entertainment value, and people stayed employed and real wages kept rising.

I do not think there is anything inevitable about how capital-labor substitution could evolve in the future. It is quite possible that future technological and organizational changes are labor-augmenting rather than labor-saving. I’ll return to this below.

Finally, Piketty can combine these supply and demand elements into a complete model of income distribution dynamics. Imagine an economy where capital is accumulated, but there are sudden shocks to savings/bequests as well as wages, and a high elasticity of substitution between capital and labor.

In this model, capital increases as a share of income, the rate of profit doesn’t fall very much (because capital and labor are very easily substituted for each other), and the distribution of capital is very unequal (because persistently high r allows capital shocks to be amplified over time). It can be embellished with increasing rates of return in wealth, reflecting the fact that richer people can obtain better financial services and diversification in order to earn higher rates of return. This model gets most of the way in explaining the stylized facts about capital in Piketty’s book.

The Limits to Capital

What I’ve described above is the conventional liberal economist’s interpretation of Piketty’s work, the one that Piketty and his critics have coordinated on in public. The question of whether capital will eat the world boils down to the degree of substitutability between labor and a single aggregate capital.

Despite assuming competitive labor and capital markets, this setup explains rising inequality and increasing capital shares, and yields a justification for capital taxation, completely within a neoclassical model. If this was all that was there, it would still be a pretty big advance within economics.

In this conventional interpretation, Piketty stays inside orthodox growth theory. His results arise from modifications to the savings equation and the marginal-pricing production function, not from alternatives to them. If the problem is just very high substitutability, a variety of labor market reforms are taken off the table, as firms would just replace workers with machines when you raise the wage. Minimum wages would kill a lot of jobs, and unions would immediately induce firms to close.

But this is again contradicted by recent evidence on both fronts. More importantly, it misunderstands capital by putting politics outside the production function, rather than inside it.

The increasing elasticity of substitution between ‘capital’ and ‘labor’ may be as much determined by institutions and property rights as by technology. Think of the parallel with slavery. The robot economy and the slave economy may both have higher elasticities of substitution than industrial capitalism. Slaves could do virtually all the tasks of free labor, and were movable assets.

In ‘The Causes of Slavery and Serfdom,’ Evsey Domar famously argued that it was a historical impossibility to have free labor, abundant land, and an aristocracy simultaneously. Free labor and abundant land would make aristocratic claims on labor impossible, abundant land and an aristocracy would require coerced labor, and only scarce land could depress wages enough to allow an aristocracy to coexist with free labor.

Perhaps a similar trilemma exists with abundant robots, dignified employment, and unequal capital ownership.

This sort of institutions-as-primitives thinking is how we should approach the question of capital. Capital is a set of property rights entitling bearers to politically protected rights of control, exclusion, transfer, and derived cash flow. The capital share of income is just the last part of that sequence.

Like all property rights, its delineation and defense require actions of state power, legal standardization, and juridical legitimacy. In the last instance, capital includes the ability to call on the government to evict trespassers, be they burglars, sit-down strikers, or delinquent tenants.

In economics, we capture some of the political dimension of capital with incomplete contracts. Contracts between financiers, entrepreneurs, and workers (among others) can never be completely specified. Instead, large domains of the economic transaction are left to the discretion of one side of the market.

A CEO like Steve Jobs complains about the power exercised by Apple’s shareholders in the late 1980s as surely as Jobs’s workers complain about the tyrannical power wielded by Jobs himself. As Ronald Coase argued, this distribution of power is not outside the market, but part of the transaction. Workers do what they are told because they can be kicked out of the firm. Capital here is seen as not just a flow of income, but rather a right to exclude and appropriate. Focusing on balance sheets rather than bosses will miss this.

Seeing capital this way also blurs the line between supermanagers and rentiers. Supermanagers happen to have labor market contracts (in the form of bonuses and stocks and options) that entitle them to stupendous income when the firm is doing well. It is not clear that this is ‘labor’ income as much as it is a form of capital that requires you to run meetings and wear a power suit.

Jointly, the rentiers and the supermanagers have cash flow and control rights inside the firm, and the institutions of corporate finance and governance that allocate these powers determine the demand for capital as surely as technology does.

The book is too good to miss this, however. It contains an excellent section on the gap between cash-flow rights and control rights in corporate governance, which suggests a capital demand schedule derived not just from firm optimization decisions, but from the distribution of power within the firm.

The book points out that German shares are ‘underpriced’ because shareholders there do not have the same level of political power as shareholders in the US and UK, since they have to share power with workers’ councils and other stakeholders. The same thing is true of unions in the US. David Lee and Alexandre Mas shows that strong union victories in NLRB elections once reduced stock prices, yet it is very unlikely they changed the replacement value of the company’s underlying assets.

The everyday encounter most people have with accumulated wealth is not through prices in the market for shoes, or the society pages, but instead the control and threats inflicted by their employers, landlords, and bankers. Inequality of income and wealth means that some people live off unjustly earned income, but it also means a lot more people are on the short-end of an asymmetric exchange, toiling away as personal assistants and Mechanical Turks.

This is where Piketty’s Walrasian conventions dampen his contribution: he discusses the first, but not the second. It’s like saying slavery is an inequality of assets between slaves and slaveholders without describing the plantation.

Even Adam Smith suggested measuring a person’s income by the ‘quantity of that labor which he can command.’ This has normally been taken to mean income of the rich relative to the wage. But it also means looking at ‘command’: what privileges and obligations can one demand from the soul purchased (or rented)?

An economy that allows indentured labor means that wealth can purchase more power over people; an economy with robust union contracts means that capital is trammeled in its control over the shop floor. From sexual harassment on the job to the indignities of gentrification and nonprofit funding, a world of massive inequality is a world where rich people get to shape environments that everybody else has to accept.

Piketty repeatedly announces that politics plays a large role in the distribution of income. But he neglects that the distribution of income and wealth also generates inequalities of larger privileges and prerogatives; wealth inequality together with a thoroughly commodified society enables a million mini-dictatorships, wherein the political power of the rich is exercised through the market itself.

In a thoroughly marketized world, the wealthy can purchase educational reform, the charity of their choice, think-tanks, legislative language, and faceless TaskRabbiters willing to work for a pittance. While feudal lords were wealthy, the absence of certain types of markets made their social power somewhat independent of wealth; the regalia and mounted vassals were an independent basis of status and were not simply purchasable.

But there is an important and nasty complementarity between massive inequality in income and wealth and a commodified, ‘fully-incentivized’ world. When every action can have pecuniary rewards attached to it, and every source of well-being can be priced at exactly a person’s willingness to pay, the social power commanded by the rich is magnified in a way that is difficult to see when comparing a dollar in 1920 with a dollar today.

Piketty’s big policy idea is taxing wealth directly, progressively, and globally. This is certainly important to put on the table, up there with other global problems like climate change, intellectual property, open borders, and, dare I say, reparations.

But the focus on taxes is again a straightjacket imposed by the equality-versus-efficiency lens through which too many public finance economists see policy issues. The preferred policy instruments are always taxes and transfers, when it is not at all clear that these alone are the best tools for reducing inequality (although they are surely useful for increasing it). This is the same technocratic spirit that makes American liberals love the Earned Income Tax Credit as the only redistributive arrow in the state’s quiver.

The structure and limitations of Piketty’s argument also explains the love the liberal American policy wonk has for it. It comes with a Zip file full of spreadsheets, a clear argument reasoned from data and common sense, the charisma of the economics profession, and a policy prescription that is technically feasible and politically hopeless.

Like the policy expert, it has neither utopian demand-it-all energy nor the concrete backing of a political actor aiming to win. The book reminds the American wonk community that if only their people could run the show, they have the expertise (and the data!) to produce finely-calibrated optimal policies without politics.

But the collapse in the capital and top income shares after World War II (and other wars) came along with radical transformations of all kinds of economic institutions, with millions of dead, sui generis geopolitics, and a host of newly mobilized popular forces. The obligations enshrined in balance sheets were destroyed by financial collapse and war, and kept in check by social democracy and postwar growth. Little in the way of clever policy advice mattered for any of this.

Where Do We Go from Here?

Piketty’s book reflects the promise and current limits of economics as a discipline. The ideas, which are powerful, could not have originated anywhere but mainstream economics. They require a command of the mathematical models of growth and taxation, and only economists would appreciate the painstaking reconstruction of the balance sheet data.

But Piketty oscillates between paying homage to fundamental forces of technology, tastes, and supply and demand, and then backtracking to say that politics and institutions are important.

So how to do better?

A first step could be a multisector model with both a productive sector and an extractive, rent-seeking outlet for investment, so that the rate of return on capital has the potential to be unanchored from the growth of the economy. This model could potentially do a better job of explaining r > g in a world where capital has highly profitable opportunities in rent-seeking rather than production, and it would generally disassociate the growth of the productive economy from the growth of abstract wealth. When people say neoliberalism was good for growth, they tend to be looking at the stock market, not GDP or wages.

More fundamentally, a model that started with the financial and firm-level institutions underneath the supply and demand curves for capital, rather than blackboxing them in production and utility functions, could illuminate complementarities among the host of other political demands that would claw back the share taken by capital and lower the amount paid out as profits before the fiscal system gets its take.

This is putting meat on what Brad Delong calls the ‘wedge’ between the actual and warranted rate of profit. Commentators have listed their pet policy proposals under this umbrella, from strengthening labor and tenants movements to weakening intellectual property rights and financial regulation. And yes, maybe even selective inflation of nominal claims, as with the repudiation of the gold indexation clause in 1933.

We need even more and even better economics to figure out which of these may get undone via market responses and which won’t, and to think about them jointly with the politics that make each feasible or not. While Piketty’s book diagnoses the problem of capital’s voracious appetite, it would require a different kind of model to take our focus off the nominal quantities registered by state fiscal systems, and instead onto the broader distribution of political power in the world economy.

DeLong on Piketty

Over at Equitable Growth: The Three Must-Reads You Need to Understand Thomas Piketty and His "Capital in the Twenty-First Century": Focus by DeLong

Piketty and DeLong

Link

Over at Equitable Growth: Thomas Piketty: On the Elasticity of Capital-Labor Substitution

Over at Equitable Growth: As I have said before in Very Rough: Exploding Wealth Inequality and Its Rent-Seeking Society Consequences (backed up by the numbers of "Roughing Out a Piketty Model") and elsewhere, in my view Thomas because he really needed a rent seeking society chapter in his Capital in the 21st Century. The underlying logic of his argument seems to be that wealth can take two forms: investments in capital-embodied technological wealth that boost wages in the economy, or investments in rent-seeking wealth that erode wages in the economy. And, I think, his argument is that we are headed for a society with a higher wealth-to-income ratio, and in such a society a greater share of wealth will find its way into the second channel. READ MOAR

Maybe that is not what Pikitty's argument is. But I at least think that it is what Piketty's argument should be--because I think it is highly likely to be true...

Thomas Piketty: On the Elasticity of Capital-Labor Substitution: "I do not believe in the basic neoclassical model...

...But I think it is a language that is important to use in order to respond to those who believe that if the world worked that way everything would be fine. And one of the messages of my book is, first, it does not work that way, and second, even if it did, things would still be almost as bad....

My response to Summers and others is... what we observe... [is] a rise in the capital/income ratio and a rise in the capital share... [in] the standard neoclassical model... the only possible logical... expla[nation]... would be an elasticity of substitution somewhat bigger than 1... that there are more and more different uses for capital over time and maybe in the future robots will make substitution even more.... Now, does this mean that it is the right explanation for what we have seen in recent decades? Certainly not....

All I am saying to neoclassical economists is this: if you really want to stick to your standard model, very small departures from it like an elasticity of substitution slightly above 1 will be enough to generate what we observe in recent decades. But there are many other, and in my view more plausible, ways to explain it.... It is perfectly clear to me that the decline of labor unions, globalization, and the possibility of international investors to put different countries in competition... have contributed to the rise in the capital share...

Cf.: Suresh Naidu: Capital Eats the World, and The Slack Wire: Notes from Capital in the 21st Century Panel; and me: The Hourly Piketty: Paul Krugman, "Gattopardo Economics", and Economic Modelling, and The Honest Broker: Mr. Piketty and the “Neoclassicists”: A Suggested Interpretation: For the Week of May 17, 2014.

Thoma on Piketty

When Piketty Argued for Income Redistribution, He Changed Economics by Mark Thoma

DeLong: productive vs. extractive

Very Rough: Exploding Wealth Inequality and Its Rent-Seeking Society Consequences: (Early) Monday Focus for October 27, 2014 by DeLong

What I would like to see Emmanuel and Gabriel guess it is the share of wealth that is productive–that boosts the productivity of the working class and that shares those productivity benefits with workers–and the share of wealth that is extractive–that are pure claims on income rather than useful instruments of production, and thus that erode rather than boost the incomes of others. Wealth plays two roles, you see: as useful factors of production that boost productivity, and as extractive social power that is the result, the cause, and the maintainer of the rent-seeking society.

Yellen, the Fed, K21 and inequality

Perspectives on Inequality and Opportunity from the Survey of Consumer Finances by Chair Janet L. Yellen

Chair Yellen Holds Forth on the Inequality of Opportunity by Jared Bernstein

What Janet Yellen Said, and Didn’t Say, About Inequality by Neil Irwin

World's Richest Man Tries to Defend Wealth Inequality by Dean Baker

rising wealth inequality's "snowball effect."

See the Bernstein link below about the decoupling of productivity and compensation for the wage class.

If not r > g, what’s behind rising wealth inequality? By Nick Bunker

The Initiative on Global Markets at the University of Chicago yesterday released a survey of a panel of highly regarded economists asking about rising wealth inequality. Specifically, IGM asked if the difference between the after-tax rate of return on capital and the growth rate of the overall economy was the “most powerful force pushing towards greater wealth inequality in the United States since the 1970s.” 

The vast majority of the economists disagreed with the statement. As would economist Thomas Piketty, the originator of the now famous r > g inequality. He explicitly states that rising inequality in the United States is about rising labor income at the very top of the income distribution. As Emmanuel Saez, an economist at the University of California, Berkeley and a frequent Piketty collaborator, points out r > g is a prediction about the future. 

But if wealth inequality has risen in the United States over the past four decades, what has been behind the rise? A new paper by Saez and the London School of Economics’ Gabriel Zucman provides an answer: the calcification of income inequality into wealth inequality.

“Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data,” their new working paper, is firstly an impressive documentation of the significant changes in wealth distribution in the United States. 

Saez and Zucman create a data series using tax records to measure wealth inequality going back to 1913. The trend is similar to the one for income inequality in the United States: a high level of inequality at the beginning of 20th century that declined substantially during the mid-century only to climb starting in the late 1970s and reaching high levels again in recent years. 

Rising wealth inequality since the late 1970s has been a case of the top of the distribution pulling away from everyone else. Specifically, the rise of the 0.1 percent is the dominant story. In 1979, the top tenth of the top 1 percent held 7 percent of the wealth in the United States. By 2012, the share held increased threefold to 22 percent. (An earlier version of this data was highlighted at Equitable Growth’s annual conference in September.) In fact, almost half of the total increase in wealth from 1986 to 2012 went to the top 0.1 percent of wealth holders. The increase is dramatic and brings wealth inequality to a level around that prevailing in 1929. 

What caused this increasing concentration of wealth? In short, an increase in income inequality coupled with rising savings inequality. As income flowed upward to those at the top, rich individuals increased the rate at which they saved income. Saez and Zucman refer to this phenomenon as the “snowballing effect.” And Piketty does consider the calcification of top incomes into wealth inequality in “Capital in the 21st Century.” 

This effect certainly isn’t the well-known r > g phenomenon. But Saez and Zucman’s research shows that there’s more than one way for wealth inequality to arise.

Piketty

Thomas Piketty, Heather Boushey, and Anwar Shaikh at the New School of Social Reseach in New York.

inequality and demand

Inequality and demand by Steve Randy Waldman

Dorothy Parker quote

Dorothy Parker in the 1956 Paris Review:

At the moment, however, I like to think of Maurice Baring’s remark: “If you would know what the Lord God thinks of money, you have only to look at those to whom he gives it.” I realize that’s not much help when the wolf comes scratching at the door, but it’s a comfort.

Wikiquote:

Man and the Gospel (1865) by Thomas Guthrie "and you may know how little God thinks of money by observing on what bad and contemptible characters he often bestows it." 

“We may see the small Value God has for Riches, by the People he gives them to.” -- Alexander Pope (1727).

 And via MaxSpeak:

“In Capital in the Twenty-First Century, French economist Thomas Piketty documents how wealth is becoming concentrated in ever fewer hands. 

This might not be a problem, were it not that capital is increasingly owned by shitheads.” 

— Harry Hutton

Piketty

video of Heidi Moore, Tyler Cowen, Bob Solow, Russ Roberts and DeLong on Piketty

Piketty

Piketty's Fence by Jeffrey Frankel

Thomas Piketty has power that heterodox economists never had by Ingrid Robeyns

Piketty and the Money View: A Reply to MisterMR by JW Mason

To own a piece of land means you have certain legal rights with respect to other people — to exclude them from the use of that land, to receive some equivalent from them if you do permit use of the land, to transfer those rights to someone else — and that no one else has those rights with respect to you. However, that’s only the first step. Next, we have to recognize that what constitutes “use” of piece of an asset is not a physical fact, but a social one. (As in the old story, the baker can exclude others from eating his rolls, but not from enjoying the smell of them.) So it would be more accurate to say that ownership of a piece of property is simply a form of social authority — a bundle of rights over other people. Indeed, if we want to relate the world of money flows to broader social reality, the most fundamental fact is probably this: The person who receives a money payment labeled “profit” gives orders, and the people who receive money payments labeled “wages” have to follow them. To say you own a piece of property is simply to say there is a set of commands that, if you issue them, other people are compelled to obey. Those rights are metonymously referred to by a label which bears a picture of some tangible good, just like the insignia on an officer’s uniform bear a picture of a leaf or a bird.

Piketty & the euthanasia of the rentier

Piketty and the Money View by JW Mason

dangerous times for the 1 percent

Class interests by Simon Wren-Lewis

So if you wanted to critique my (and Kalecki’s) characterisation of the views of the wealthy, you might say that keeping unemployment above its natural rate is not a sustainable strategy (and therefore not rational). To which I would respond maybe, but there could be a reason why now, like the 1980s, is a particularly important time to keep unemployment high for a while. 

The reason for this is that the aftermath of financial crisis is extremely threatening to the neoliberal political consensus and the position of the 1%. I remember saying shortly after the crisis that the neoliberal position that government regulation was always bad and unregulated markets always good had been blown out of the water by the crisis. This was politically naive, in part because a crisis caused by unregulated markets was morphed by the right into a crisis caused by too much government debt, or too many immigrants. But that fiction will not be sustainable once a strong recovery has reduced both government debt and unemployment. For the 1%, these are very dangerous times, and they want to be on favourable territory for the battles ahead.

See Piketty.

Blinder tweaking the WSJ with K21

The Supply-Side Case for Government Redistribution by Alan Blinder

strange defeat of fair trade and sound finance

I pretty much agree with DeLong and Krugman on most things.. But DeLong's defense of NAFTA has returned memories of how Krugman used to argue for free trade in the late 90s as the left protested NAFTA and the the Battle in Seattle had riots over a WTO meeting, which began the militarization of the police.

In the discussion of Piketty a main focus is the aggregate of capital and labor income share. Larry Summers suggest free trade is in the process of working itself out. Dean Baker, another great teacher and populizer like DeLong and Krugman, has suggested the same in regards to China.

But there has been a long run of the working out. Now, both DeLong and Krugman say the U.S. could lower its trade deficit by devaluing the currency but don't emphasize it the way Baker does.

J.W. Mason has been focused on the euthanasia of the rentier and that's another matter of debate under Piketty's K21. It's part of the process of what's being worked out as Summers put it. But with rising inequality, the 1 percent gain in political power and can keep the their returns up.

DeLong and Krugman mistankenly focused on "sound finance" sort of. Krugman on how the Bush tax cuts and deficits would drive up rates. DeLong on Clinton's deal with Greenspan. But both were the pushed to the left by the Bush years, the housing bubble/financial crisis and the Insane Clown Posse Show/ Dark Age of Economics. To be reality-based is to be radical.

hedge funds and the euthanasia of the rentier

Capital Decimation Partners: slight return by Daniel Davies

Investors Pay for Hedge-Fund Illusions by Noah Smith

Innovation in Higher Ed, 1680 Edition by J.W. Mason

Makes me think of Nate Silver's Signal and the Noise and wishes he had a chapter on hedge funds.

inequality

A New Report Argues Inequality Is Causing Slower Growth. Here’s Why It Matters. by Neil Irwin

internal transfers

Explaining Piketty: inequality and the financial crisis by France Coppola

German, Japanese and - above all - Chinese lending to the US is the so-called "savings glut" that is widely blamed for creating the financial instability that led to the financial crisis. But Piketty argues that this source of capital is tiny compared to that generated by rising inequality WITHIN the US (my emphasis):

"...this internal transfer between social groups (on the order of fifteen points of USnational income) is nearly four times larger than the impressive trade deficit the United States ran in the 2000s (of the order of four points of national income). The comparison is interesting because the enormous trade deficit, which has its counterpart in Chinese, Japanese, and German trade surpluses, has often been described as one of the key contributors to the “global imbalances” that destabilized the US and global financial system in the years leading up to the crisis of 2008. That is quite possible, but it is important to be aware of the fact that the United States’ internal imbalances are four times larger than its global imbalances. 

"So the total amount of capital available for investment in the US at this time was far larger than the imported "savings glut" caused by its trade deficit. And because the US was importing capital, all of that capital had to be invested WITHIN the US***. As I've noted already, the corporate sector was (and is) running a structural surplus. That leaves the household sector and the government sector to absorb the capital. No wonder lenders aggressively targeted those households most in need of money. They had to put that capital somewhere****, and poor households were both the easiest to lend to (because they needed the money) and gave the best returns (because they were the highest risk). Financial innovation enabled far more of this capital than usual to find its way to poorer households: the concentration of risk that would normally have limited individual lenders' exposure to poorer quality borrowers was dispersed across the globe through securitisation and amplified with derivatives.