Piketty, Piketty, Piketty


In the distant past, when WC still followed professional American football, there was an interview after a blow-out game when a defense player on the losing team announced, “Yeah, we lost, but they didn’t score any touchdowns on us.” WC’s impression of those who deny rising income inequality in the Western world is that they are like that nameless defensive football player: they’ve lost the argument badly but keep sniping in hope of confusing and clouding the issue.

Thomas Piketty in his office at the French School for Advanced Studies in the Social Sciences. Credit Charles Platiau/Reuters

Thomas Piketty in his office at the French School for Advanced Studies in the Social Sciences. Credit Charles Platiau/Reuters

WC isn’t an economist and doesn’t pretend to be, but is slogging through the 696 pages of Prof. Thomas Piketty’s Capital in the Twenty-First Century (but without reviewing the copious on-line references and Excel spreadsheets). WC thinks that Prof. Piketty has made an overwhelmingly powerful case for his thesis:

Capitalism has a natural drift toward high income and wealth inequality. Assets like real estate and stocks disproportionately held by the wealthy (capital) rise faster than the incomes from labor in the economy (growth). This process was temporarily reversed by the world wars of the first half of the 20th century, but now inequality in the United States and Europe is rising back toward pre-World War I levels. This is a bad thing, which should be fought through radical policy measures like a global tax on wealth.

Prof. Piketty draws from data going back a hundred years or more for an impressive array of countries; his focus is not just  the United States. He goes into greatest detail on the U.S., Sweden, France and Great Britain. But his discussion is on Western economies in general. To reach his conclusions, he relied upon three data sets: tax information, census data and surveys. Of the three, surveys are the least reliable. Not just because folks may lie about how wealthy they are, but because the sample size of zillionares is small. That makes it statistically unreliable. Nor are there “surveys” as such for pre-War periods, only census data and tax returns. So when critics like Chris Giles, Economics Editor of The Financial Times accuse Prof. Piketty of flawed and sloppy techniques, and then compare modern survey results with historic tax data, the critics themselves are comparing apples to oranges, a patently sloppy research technique.

Prof. Piketty’s evidence of increasing income inequality is overwhelming. His critics haven’t meaningfully rebutted his evidence there. His evidence of increasing wealth inequality is merely very strong. His proof that those trends are inherent in capitalism are a very strong inference drawn from the data he has assembled. His argument that it is bad for democracies to have highly concentrated wealth and income are unpalatable to the wealthy, so instead of addressing his rigorous arguments and very impressive evidence, the wealthy attack him as a Marxist.

Let’s try another metaphor. When WC gets into arguments with Creationists, they argue that science should not trust radioarbon dating because it is inaccurate, that measurements with carbon dating can be off by as much as 5%, and that contamination can create a further 5-7% of error. Never mind that the argument is simply wrong. When something is carbon dated to 45,000 years before present, even the Creationists’ claimed 12% error leaves the Creationists with a massive problem: 45,000 – 5,400 years = 39,600 years before present. That’s difficult to reconcile with a universe that’s supposed to be less than 7,000 years old.

The critics of Prof. Piketty and his work seem to WC to be in much the same spot as those Creationists. Attacking a few data points, with weak or flawed arguments, but unable to address or rebut that real issues and overwhelming evidence that are being raised.

WC recognizes that economics is about the least popular subject that gets discussed around here, excepting possibly geology. But while it is the dismal science, it is also overwhelmingly important at a policy and practical level. WC doesn’t expect this readers to hurry out and buy Prof. Picketty’s book – although it is actually a New York Times best seller – but Prof. Piketty’s book has reinvigorated the debate over the concentration of wealth.

You can expect the very wealthy to mount a continuing attack on the book, Picketty himself and any policy initiatives  to address that concentrated wealth. Entrenched wealth presently has the political and legal systems stacked in its favor. You can expect a cloud of disinformation, ad hominem attacks and defense of the status quo. But Capital in the Twenty-First Century is a valuable contribution, an important part of the effort to change the present rules.

You can read a more detailed overview of this debate at Neal Irwin’s article, “Everything You Need to Know About Thomas Piketty vs. The Financial Times” and Paul Krugman’s essay in the New York Times, “On Inequity Denial.”

 

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One thought on “Piketty, Piketty, Piketty

  1. In the interest of full disclosure, I have not read Mr Piketty’s book. I do, however, instantly take issue with anyone who – when appraising the situation in the United States – uses as an argument

    ” Assets like real estate and stocks disproportionately held by the wealthy (capital) rise faster than the incomes from labor in the economy (growth).”,

    when such an assertion is not instantly followed by an analysis of the many trillions of dollars held by and earned for the pension funds of American labor. The establishment – primarily a phenomenon of the 1960s and early 1970s – of the pension fund as an active money manager – stocks, bonds and real estate – made possible much of the retirement security that most (certainly not all!) Americans over the past three decades and into the next several decades have had and will have. To me, however, significantly more important than that has been this phenomenon’s concurrent influence on equity markets themselves. As hideously wealthy as any number of hedge fund managers and corporate titans may be, their combined wealth is little more than an accounting error when compared to the overwhelmingly dominant pool of assets held by pension funds.

    When viewed in this light, a far more intriguing and justifiable argument can be made that the past half century has brought socialism to the United States in far more effective a way, and through a far more effective means, than anyone espousing socialism in the traditional sense ever could have imagined.

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