Must-Read: Miriam Ronzoni: Where Are the Power Relations in Piketty’s Capital?

Must-Read: The extremely-sharp Miriam Ronzoni excellently puts her finger on a substantial hole in Thomas Piketty’s Capital in the Twenty-First Century.

Piketty starts, I think, from the observation that the French Second Empire and Third Republic–extraordinarily egalitarian in politics for white native-born males either as equal subjects of the Bonaparte dynasty or equal citizens of the Republic–were extraordinarily unfriendly to egalitarian economic measures. And, in addition, capital was able to adjust and rig the system of property rights in order to neutralize the forces of supply and demand that economists see as naturally making a high-capital economy a low-profit rate economy. Piketty strongly believes that a non-plutocratic society requires a low level of r-g, a low level of the difference between the profit rate r and the growth rate g. With r fixed save in times of societal catastrophe by the hegemonic power of capital even in political democracies, escape from plutocracy this hinges on boosting g, on a higher overall economic growth rate.

But, Ronzoni points out, this fatalistic analytical conclusion by Piketty has no impact on his suggested political strategy. A trust in Habermasian discourse and in the effectiveness of mobilization for social democracy appears out of thin air–both in the later pages of Piketty’s text, and in his post-publication career as a public intellectual. It’s not even “pessimism of the intellect, optimism of the will”. It’s simply a disconnect:

Miriam Ronzoni: Where Are the Power Relations in Piketty’s Capital?: “My concern about Piketty’s proposal is that there seems to be a friction…

…between the diagnosis offered in the rest of the book (which seems to draw a rather bleak picture of the power of capital in the early 21st century) and the suggested cure (which seems to rely on the optimistic hope that, once well-minded citizens will have recognized the problem, the only hurdle will be to find the right policy to fix it)…. Piketty seems to hold on to a social-democratic [political] optimism… whereas his findings seem to push him in a different direction…. [By] ‘social-democratic optimism’ I mean… optimism about the role of policies and institutions in taming capital… [plus] the persuasion that… politics is fundamentally about is making citizens understand… and then they will be persuaded to do the right thing…

Must-Read: Marshall Steinbaum: Thomas Piketty at the University of Chicago

Must-Read: It is genuinely surprising to me that Kevin Murphy thinks that Katz and Murphy (1992) is still close to the last word on inequality. And it is beyond genuinely surprising that Steve Durlauf thinks that Bill Gates’s wealth was acquired by merit and John D. Rockefeller’s by monopoly when they are both winners in gigantic winner-take-all natural-monopoly markets–a natural-monopoly created by economies of scale in refining and distribution in the case of oil, and by write-once run-everywhere protected by patent and copyright in the case of operating systems:

Marshall Steinbaum: Free-Market Dogmatism Still Going Strong at the University of Chicago: “A discussion between Piketty and… Kevin Murphy and Steven Durlauf…

…with Jim Heckman acting as moderator…. [Murphy] thinks that his 1992 paper with Lawrence Katz, which tried to explain the dynamics of the college wage premium in the 1970s and 1980s with reference to the supply and demand for skilled labor in the form of workers with a college degree, constitutes the final word… [even though] its model fails at explaining… labor market outcomes… since… [and relies on the residual of] skills-biased technical change: the Ghost in the Free Market Economics Machine….

Piketty started things off by claiming that… globalization and skill-biased technical change… don’t explain the phenomena… closed with what I consider a profound restatement of why Capital in the 21st Century is such an important book:

The gap between [the] official discourse and what’s actually going on is enormous. The tendency is for the winner to justify inequality with meritocracy. It’s important to put these claims up for public discussion.

Durlauf… said, quite reasonably, that the key mechanism of inequality is segregation, because it translates individual inequality into entrenched deprivation, and that its policy implications are therefore to foster integration in a variety of contexts….

Murphy’s presentation was where the wheels came off, intellectually speaking. He declared… by regurgitating his 1992 paper… [saying] “that theory has done an amazing job,” including a cryptic statement about how it explains the rise of tail inequality “if you extrapolate,” whatever that means…. Murphy stepped forward once again to declare that the economy’s “natural supply response of supplying capital” will help workers by reducing the capital share and increasing their productivity…. Durlauf asserted in his JPE review of C21 that no one thinks like Clark anymore, with his quasi-moralistic view of the efficient functioning of capital formation and the adjustment of its rate of return. Unfortunately, Durlauf’s empirical prediction was falsified by Murphy right there on that stage…. Murphy added that in the absence of better education, “The march of technology over time means there’s little for someone with no human capital to do.”… Then things got weird. Durlauf… [said] what mattered was [Americans’] perception of [inequality’s] source: whether justified by merit, as in the case of Bill Gates, or extracted through monopolization, as with John D. Rockefeller. At that, Piketty quipped that Bill Gates certainly agrees….

Murphy[‘s]… idea seems to be that the poor, benighted though they are, will adopt the morally correct position of looking out for their own interest by acquiring an education, so long as the incentive to do so is preserved by avoiding progressive taxation. Usually the fallacy in the moral philosophy of economics… is to argue that whatever reality exists is for the best…. In this case, though, the “ought” is a priori: people should be selfish. For that reason, they probably will be, so long as the status quo is maintained as an instructive lesson in the disaster befalling anyone not born rich…. Durlauf made a final, inscrutable point… saying that we should directly address the harms caused by inequality, by which he was referring to capture of the political system by the wealthy…

The Importance of Private Equity Supermanagers among Top Income Earners

A new data interactive published today by the Washington Center for Equitable Growth should help elevate discussion about the growth of incomes at the very high end of the U.S. income ladder and how that growth affects economic inequality and growth. To help inform that debate about who the people in the 0.1 percent are, we here at the Washington Center for Equitable Growth have produced a data interactive about who is in the top 0.1 percent of the income distribution, based on a 2012 white paper by economists Jon Bakija of Williams College, Adam Cole of the Office of Tax Analysis at the U.S. Department of the Treasury, and Bradley Heim of Indiana University. Looking at tax data, their report looked at the types of jobs held by the top earners in the United States between 1979 and 2005..

Their work provides a great window into how our economy has been changing at the top end of the income spectrum. The data in their study indicate that “supermangers” (as economist Thomas Piketty of the Paris School of Economics refers to business executives and managers in his book “Capital in the 21st Century”) constituted about 60 percent of the top 0.1 percent of the income distribution over that period. While this level did not changed substantially over time, the nature of the supermanager definitely did. People working in finance in 2005 claimed 18 percent of that 0.1 percent, up from 11 percent of the 0.1 percent in 1979. And the types of executives in this mix went from being 20 percent private equity or closely held firms in 1979 to more than half in 2005.

This mirrors the trend in corporate structure in the United States toward more private ownership, most likely because of the elevated role of private equity investing over this period. Big Wall Street private equity firms and financial institutions are huge players in in private equity investing.

James Manzi, a senior fellow at the Manhattan Institute for Policy Research, wrote a piece attacking Piketty’s discussion of supermangers by arguing about the decline in the share of the 0.1 percent that work in publically held companies. But Manzi fails to discuss the rise of those in private equity and closely held firms—which is particularly odd because he cites the Bakija, Cole, and Heim white paper and even found the correct table in the document to find these observations. By missing this point, both his number crunching and critique of Piketty fall way off the mark.

That said, understanding the changing nature of the top 0.1 percent is important for understanding the changes that have been driving our economy. Piketty’s work on the supermanagers is interesting, but only serves to highlight how little we know about this extremely high-income group.

Who are today’s supermanagers and why are they so wealthy?

What explains the changes in top-earning occupations over the past four decades? Perhaps the most intriguing argument about the current state of income inequality in the English speaking economies that Thomas Piketty makes in his bestseller “Capital in the 21st Century” is this—“the vast majority (60 to 70 percent, depending on what definitions one chooses) of the top 0.1 percent of the income hierarchy in 2000-2010 consists of top managers.” He goes on to argue on page 302 of his book that the rise in labor income “primarily reflects the advent of ‘supermanagers,’ that is, top executives of large firms who have managed to obtain extremely high, historically unprecedented compensation packages for their labor.”


This really begs the question as to how and why these supermanagers came into existence. Nobel Laureate Robert M. Solow points out in The New Republic that this is primarily an American outcome. And Henry Engler at Thomson Reuters Accelelus’ Compliance Complete recently published an excellent piece on Piketty’s supermanagers in the United States and the United Kingdom. Both writers agreed with Piketty that these supermanagers were being vastly overly compensated given their questionable contributions to productivity.

I hope to shed a little more light on this issue by examining the change in professions comprising the top 0.1 percent of tax filers between 1979 and 2005. The purpose: to examine whether the changing composition of this super elite reflects changes in our economy that may explain the link between rising economic inequality and anemic economic growth over this period.

To do so, I used data from the April 2012 white paper “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data,” by economists Jon Bakija of Williams College, Adam Cole of the Office of Tax Analysis at the U.S. Department of the Treasury, and Bradley Heim of Indiana University. They used tax data on the top 0.1% of filers to identify the top earning professions. The infographic below tells the tale, charting the change in occupations at the tippy top of the income ladder in 1979 and 2005.

The biggest change in the distribution of top earners is in the types of executives, managers, and supervisors at non-financial firms. In 1979, most of these people worked for large, publicly traded firms but by 2005 more were working in closely held firms. There is not enough information to provide a clearer picture as to who exactly these people are, but chances are they are employed by firms that are owned by private equity firms—the growth in the private equity industry over this period of time was substantial—and because financial professionals saw large gains, too. The share of people in the top 0.1 percent working in finance also increased substantially, to 18 percent in 2005 from 11 percent in 1979.

These findings are consistent with Piketty’s analysis in his new book. But there are alternative explanations. One is presented in George Mason economist Tyler Cowen’s latest book, “Average is Over.” He claims a skill biased-technological change is responsible for the shift in top occupations over roughly the same period. He argues that technology allows top performers to capture more of the market and thus earn substantially more than average performers. He and many other people hypothesize that this is a driver of increased economic inequality.

But if technology were a primary driver of inequality, then one would expect that skilled trades would have larger incomes and would have become a larger share in the top 0.1 percent. While there are slightly more technical types and entertainers among top earners (as can be seen in the data presented in our interactive) the biggest gains in both percentage terms and magnitude were among privately held business professionals.

Thus, the so called “average is over” argument—that that the top performers in each field will capture a bigger share of the pie—may be a driver of inequality, but it does not appear to explain the bulk of the changes in occupations at the top of the income ladder. Instead, the supermanagers appear to be capturing greater share of the wealth as is argued by Piketty and others. More detailed data would be required to assess who these people are and how workplace dynamics changed from 1979 to 2005 that would explain the change in income. The Washington Center for Equitable Growth will be examining this data in more detail in forthcoming publications.

Is Piketty’s treatment of housing an excuse to ignore him?

French economist Thomas Piketty’s treatment of housing as capital in his blockbuster “Capital in the 21st Century” is not an excuse to ignore his predictions about rising economic inequality. “Capital in the 21st Century” is clear from the beginning that housing—and real estate generally—ought to be included in the definition of “capital” for the book’s purpose, which 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 “rebuttalsattacks that treatment of housing as capital. The critics focus on that aspect of his analysis because a large proportion of the increase in the capital-to-income ratio that he emphasizes is thanks to the accumulation of housing and real estate at market prices. In some countries, the rise in the value of housing accounts for all of the increase in the capital-to-income ratio since 1970. And even beyond housing, Piketty’s approach is not consistent with standard neo-classical economic theory in several important ways—and so the critics have looked to housing as a reason to cling to their theory in the face of his countervailing facts.

But if housing were not counted as part of capital in Piketty’s analysis then the wealth distribution patterns he explores would be even more skewed. He identifies one key historical phenomenon that is unique to the 20th century—the rise of what he calls a  “patrimonial middle class,” that is, non-trivial, inheritable wealth holdings by those between the 50th and 90th percentiles of the wealth distribution in advanced economies, rather than the top decile holding nearly all the wealth as was true in the 19th century and previously.

So, even though total capital accumulated (as a percentage of national income) has already reached the level where it was in the late 19th century, inequality has not yet attained its prior height, at least not in Europe, because that capital is partly held by the middle class. And their wealth is largely in housing.

This means that removing housing from consideration would by fiat skew the wealth distribution as much as Piketty predicts it will be skewed in the future if that patrimonial middle class dwindles, which is the dire outcome his whole book warns against. In other words, the arguments put forward as part of an attempt to discount Piketty’s prediction about the rise in capital’s share of income would, if accepted, put his prediction about the evolution of wealth inequality into effect mechanically. So how should economists interpret housing wealth?

Is housing capital?

Claim:  Housing is not “productive” capital, like machines or factories or even farmland.

Response: In fact, housing is productive in the sense that it produces a good—shelter, broadly conceived—that economic agents value. Someone who owns his or her home doesn’t have to pay rent, and the owner of an investment property will earn rent exactly as does the owner of some piece of “productive” capital equipment. Second, capital functions as a store of value, and not simply as an input to production—a function that Piketty’s historical data show has been vital over the long run.

To take the argument a bit further, the value in real estate is often a matter of proximity—of “location, location, location”—and proximity to productive economic activity or to agents whom it is valuable to know is a very real economic resource. That proximity is capitalized as real estate. An identicallysized and equipped dwelling in Manhattan, Kansas costs much less than one in the more famous Manhattan because of the productivity and amenity benefits that come from living and working near many other people in New York City.

Arguably, in a world of increasing population density, location has been getting more important, and incumbent owners of real estate have been the main beneficiaries. Klaus Desmet at the University of Charles III and Esteban Rossi-Hansberg at Princeton University have a 2014 paper called “Spatial Development” that emphasizes population densification as the cause of productivity gains, location rent dynamics, and inter-sectoral employment flows in the United States. Piketty doesn’t discuss spatial trends as such, but the dynamics of housing wealth are entirely consistent with the argument in “Capital in the 21st Century.”

Excluding housing and real estate from the capital stock is convenient if the goal is to dismiss Piketty’s data and predictions, but that interpretation is not warranted by economic theory or empirical analysis.

How should the value of housing be calculated?

 Claim: Piketty’s use the market price of housing distorts his analysis because housing should be priced according to its discounted rental stream, which is a measure of its “fundamental value.” The market price is subject to bubble dynamics, which according to the standard economic theory of bubbles would occur when the price deviates from some notion of its fundamental value, such as if a fruit tree were to cost more than the appropriately discounted sum of all the fruit it will ever produce.

Response: This critique fails for the same reason the argument that housing isn’t capital fails—because capital, broadly conceived to include wealth, is a store of value, and thus the stream of annual rent from its users isn’t the only relevant aspect of the return to its owner. The price of housing in central metropolitan areas has been on an upward march for the past several decades, in part because economic agents foresee dynamics of the kind described by economists Desmet and Rossi-Hansberg and in part because investing in real estate abroad is an effective way for the wealthy global elite to stash their cash overseas. At times, this has given rise to the property bubbles observed in Japan before 1990 and in the United States before 2006, but the resulting firesales do not erase the long-run trend. The fluctuation in housing market prices probably occurs in part because of misperceptions or misevaluations of the timing of long-run trends, but that does not imply the trend doesn’t exist.

Is housing really as substitutable with labor as Piketty assumes?

Claim:  Including housing in the stock of capital should reduce Piketty’s assumed value for the marginal rate of substitution between capital and labor, and hence his prediction of an increasing capital share of income. Piketty’s assumption that the marginal rate of substitution between capital and labor is greater than one is important since it implies that the aggregate rental rate of capital will not decline by as much as the stock of capital increases.  In other words, workers face no threat of losing their jobs just because more houses exist since there’s “no way to substitute a house for a worker.”

Response: Piketty’s main argument that the marginal rate of substitution is greater than one—that workers are indeed threatened by capital accumulation, including housing—is based on the dual U-shaped historical evolutions of the capital-to-income ratio and capital’s share of income in the very long run. That implies that when capital is accumulated, the resulting decline in the price of capital is not large enough to offset the increase in its quantity. Hence, the total share of income going to capital is higher when there’s more capital. If the marginal rate of substitution were less than one, the capital share would move inversely with the capital-to-income ratio, and if it were equal to one, as neo-classical theorists generally assume, the capital share would not change at all with the capital-to-income ratio.

All the evidence that the marginal rate of substitution between capital and labor is less than one cited by the critics is drawn from relatively short-run studies of the tradeoff between capital and labor at the firm- or industry-level, and there are very good reasons to believe that long-run elasticities are higher. Piketty’s long-run, aggregate evidence already includes the historical value of housing in capital, so this critique doesn’t bring anything more to the table—Piketty already has an excellent empirical case for assuming the marginal rate of substitution is high: the dual U shapes cited above.

Moreover, the aggregate marginal rate of substitution incorporates a much larger range of empirical economic phenomena than simply how easy it is to substitute between two factors in the production of a single good. So interpretations that adhere narrowly to that premise—such as econometric estimates at the firm or industry level—are bound to fail. The neo-classical argument holds that the price of capital is determined by its marginal productivity, and that marginal productivity declines mechanically as the quantity of capital increases. That is the so-called Ricardian scarcity principle, named for the 19th century thinker David Ricardo.

The rate at which it declines depends on how substitutable capital and labor are. The argument that they are not very substitutable implies that additional capital is relatively useless—and hence that its price will get much lower as its quantity increases. Notably, if what is relevant about housing and its value dynamics is that it acts as a store of value, then there’s no reason to believe that diminishing marginal productivity is operative. That concept relates to the additional output produced by increasing the use of one input in production while holding all others constant, but there’s no production going on if what’s being amassed is a store of value.

In this sense, housing wealth accumulation is like hording a precious metal: how useful the metal is in the production of other goods is irrelevant to the value of the horde. Finally, there are strong empirical reasons to believe that the price of housing, and of capital in general, is not only determined by marginal productivity as in the traditional, neo-classical macroeconomic model. That is the subject of my next response.

Are housing price increases due to supply restrictions?

 Claim: There’s been a great deal of research into the dynamics of the housing market since the housing bubble burst, starting in 2006, and especially the unsurprising conclusion that local housing supply elasticity is related to price dynamics, and further, that political pressure by homeowners and the mortgage lending industry, especially on the west coast of the United States, has constrained housing supply and led to the enormous price swings. Those supply restrictions have nothing to do with the rise in the capital-to-income ratio and the reasons for it proposed by Piketty.

Response: This explanation for housing price dynamics isn’t actually distinct from Piketty’s narrative. The Economist commentator Ryan Avent wrote about this eloquently: “Over the last few decades technological changes have greatly increased the return to locating in large cities filled with skilled people. Being in such places makes workers more productive and raises the income they are able to earn. But skilled cities have not allowed housing supply to expand to meet rising demand. Housing has therefore been rationed by price, pushing less productive workers toward cities where housing supply growth is higher and housing cost growth is lower.

As a result, fewer people live in the most productive places, and quite a lot of the gain from employment in productive places is captured by landowners earning rents thanks to artificial housing scarcity. This may mean lower overall productivity, more income inequality, and more income flowing to capital rather than labour.” In other words, what we have here is collective political action to make sure the price of housing remains high just as increases in the bargaining power of capital relative to labor have contributed to the decline of the labor share. There is no room in the neoclassical model for these effects—only for the Ricardian scarcity principle and diminishing marginal productivity—but that doesn’t mean they aren’t there.

The answers are clear

Piketty’s framework, including his decision to count housing as capital, does not map directly onto the standard neoclassical economic growth model—but his approach is more consistent with empirical reality in several key ways. The critics who want to cling to their outdated theories have latched onto his interpretation of housing as a way to do so, but given their theory’s many empirical shortcomings, they are seriously misguided.

Heritage Weighs into the Inequality Discussion with Some Problematic Data Analysis

It is great that Heritage Foundation pundit Stephen Moore and The University of Ohio economic historian Richard Vedder are talking about economic inequality in the opinion pages of The Wall Street Journal, but they seem to have missed the mark. They correctly note that the states (and the District of Columbia) with the highest economic inequality, at least as measured by the Gini coefficient of income inequality, tend to also be “blue” states (those that tend to elect Democrats). They go on to argue Democratic policies are failing to reduce inequality.

This piece and its underlying data analysis have three fundamental flaws:

  • The Gini coefficient they are referencing is of income and does not factor in the effect of taxes or transfers. Thus, the measure they are using explicitly misses the impact of the policies that they claim are ineffective.
  • They are suffering from one of the cardinal sins of data analysis: omitted variable bias. More populous areas also tend to have higher inequality, at least in part because higher density allows for higher incomes. Furthermore, cities and urban areas also tend to elect more progressive leaders for a variety of reasons. Thus population density is the omitted variable. They fundamentally misunderstand (or at the very least ignore) the relationship between inequality and population density.
  • Finally, they are factually incorrect to say the 1980s and 1990s are emblematic of the very laudable notion that  “a rising tide lifts all boats.” As can be seen in the figure below, median hourly compensation has been essentially flat since 1970 despite the fact that per capita economic growth more than doubled over the same period.



It is certainly possible that they made these errors because they are neophytes to the inequality discussion, but it is important to correct them now so that these spurious claims do not propagate. Now that pundits from the Heritage Foundation are dipping their toes into the inequality discussion, I hope that they can bring some new and interesting policy ideas instead of misinformation and boilerplate rhetoric to the discussion.

Piketty’s data deserve better analysis

There was buzz across the economics blogosphere and twitterverse over the Memorial Day weekend and into the work week today about Chris Giles’ Friday afternoon Financial Times piece claiming that data errors in the best-selling “Capital in the 21st Century” invalidate author Thomas Piketty’s results on the relationship between economic growth and the concentration of wealth.

Giles’ claims attracted substantial attention in no small part because his attack strikes at the Paris School of Economics professor’s data, which have been nearly universally praised for thoroughness—even by critics who disagree with the conclusions that he draws from them. While it is clear that Giles spent some time looking over Piketty’s spreadsheets, he jumps to conclusions that are not supported by the points he raises.

Indeed, my examination of Giles’ analysis and the spreadsheets that Piketty provided to the public indicate that perhaps the key claim by Giles is erroneous. Giles bases his argument that there was not an increase in wealth concentration in the United Kingdom but rather a decrease on a single data point from a 2010 wealth survey in the UK. Because that survey did not exist in 2000, it cannot be directly compared to other time series data without harmonization. The entirety of the drop Giles claims is occurring can be explained by switching from one survey to another.

In contrast, Piketty went through the different surveys and sources to stitch together a coherent data set that is presumably free of these discontinuities. In order to do his comprehensive analysis of the change in wealth inequality over time, Piketty had to look at disparate data sources, harmonized them (so that he could compare apples to apples), and draw conclusions. Wealth is notoriously difficult to measure, which makes working with wealth data especially tricky. Piketty has been exceptionally transparent with the data sets used in his book (the data can be found here).

Giles uses the raw, non-harmonized wealth data to claim that wealth inequality in the United States has been flat and that it has been decreasing in the United Kingdom. Yet by combining these non-harmonized data sets, Giles is comparing apples to oranges. To say that this deviates from best data practices would be an understatement. In addition, as Piketty notes in his response to the article, recent work by Emmanuel Saez and Gabriel Zucman using better data and more sophisticated methods show an increase in wealth concentration in the United States. I am not aware of comparable analysis for the United Kingdom to confirm or refute those claims made by Giles.

Many of Giles’ other critiques highlight the difficult choices that economists must make when working with complicated data. Some of his points about data mistakes suggest that Piketty may need to update a few figures and data points in a second edition of his book. Just like many textbooks (and other publications such as the Financial Times) contain errata, so will this 700-page empirical work. Some of Giles’ points do require a more thorough response from Piketty than the one he has already given, especially Giles’ claim that Piketty sometimes cherry-picks his data. None, however, seem likely to ultimately undermine Piketty’s basic empirical insight—that across time, societies tend toward an ever-increasing consolidation of wealth in the hands of the few.

In this light, Giles’ critique of Piketty’s research jumps the shark when he compares it to the Reinhart and Rogoff spreadsheet scandal, where their widely-cited debt study was used to push fiscal austerity policies for debt-burdened economies was debunked when a graduate student got his hands on their spreadsheets and discovered that they had made a summation error that materially altered their conclusions.

Piketty may have made a few errors, and we certainly look forward to future work that corrects any errata and more deeply works through any questionable data decisions. He also did not always provide enough detail about his harmonization methods—his explanation for the wealth data can be found here on pages 56-62—so providing more details in the future would be wise. But the sum total of his work and that of others suggests that the basic insights that have made Piketty’s “Capital in the 21st Century” a phenomenon in economics are solid.

No piece of research is above reproach and, particularly given the volume of work in the book, this research will require extensive study for confirmation. That said, the critique by Giles has much less than meets the eye.

I’m not alone in drawing this conclusion after a careful look at Giles’ points and Piketty’s data. Some of the best analysis on this that I read over the long weekend includes:

  • Neil Irwin and Justin Wolfers at The Upshot both do great work putting the debate in context.
  • Mike Konczal also does a good job responding to the points individually.
  • For more, I also recommend looking at the Twitter dialogue between Gabriel Zucman (@gabriel_zucman) and Scott Winship (@swinshi) on Saturday.
  • Roosevelt Institute: In “The FT Gets Piketty’s Capital Argument Wrong,” the think tank notes that Giles writes, “The central theme of Prof Piketty’s work is that wealth inequalities are heading back up to levels last seen before the first world war.” The institute says “this is incorrect, or at least badly stated. Piketty’s central theme is not that inequality of the ownership of wealth is going to skyrocket.”
  • Washington Post: A piece in Wonkblog titled “Is Piketty’s ‘Capital’ full of mistakes?” starts with this—“The nine most terrifying words in the English language for a researcher are: You made spreadsheet errors like Reinhart and Rogoff did.”  Wonkblog then concludes that “this doesn’t seem to be a Reinhart and Rogoff situation. Their Excel errors really did change their conclusions. Piketty’s don’t.
  • Bloomberg: The wire service published a piece titled “Piketty Rejects ‘Ridiculous Allegations of Data Flaws,’” in which the wire service notes that Scott Winship, a fellow at the New York-based Manhattan Institute for Policy Research, said the newspaper’s allegations aren’t ‘significant for the fundamental question of whether Piketty’s thesis is right or not.’ Bloomberg also noted that James Hamilton, an economics professor at the University of California, San Diego, said there’s ‘abundant evidence’ of widening inequality ‘from a good many sources besides Piketty.’


Morning Must-Read: John Quiggin: Wealth: Earned or Inherited?

John Quiggin: Wealth: earned or inherited?: “The efforts of the right to discredit Piketty’s Capital…

…have so far ranged from unconvincing to risible…. One point raised in this four-para summary by the Economist is that ‘today’s super-rich mostly come by their wealth through work, rather than via inheritance.’… For those who haven’t… got around to reading [the book]….

Wealth inequality is also high, though it has not increased as much as income inequality…. Rattner [says]… ‘those at the top were more likely to earn than inherit their riches’. Since I’m already noticing that point popping up in the places you might expect… let me point out that Rattner’s explanation… is wrong, and that there is every reason to expect a boom in inherited wealth. The fact that currently wealthy Americans have not, in general, inherited their wealth follows logically from the fact that, in their parents’ generation, there weren’t comparable accumulations of wealth to be bequeathed… growing inequality of income must precede growing inequality of wealth, since wealth is simply the cumulative excess of income over consumption…. So, given highly unequal incomes, and social immobility, we can expect inheritance to play a much bigger role in explaining inequality for the generations now entering adulthood than for the current recipients of high incomes…

Morning Must-Read: Heather Boushey: On Thomas Piketty

Heather Boushey: On Thomas Piketty: “Has Piketty convinced us that ‘The past tends to devour the future’…

…[that] we are likely to see ever-increasing inequality unless we take action?…. Piketty’s predictions hinge on a few assumptions…. Policy makers in developed-country democracies obviously have the ability to raise tax rates, but for Piketty the assumption they will not is useful, as it establishes the outer bound on the rate of return if policymakers choose to eliminate all capital taxes…. Piketty provides a convincing case that there is nothing natural about equitable growth…. I agree with Piketty that we should worry whether income inequality is calcifying into wealth inequality. I am far less concerned about whether his predictions about the rate of return on capital or the rate of growth are precisely true…. I’m living in the here and now, where the top 1 percent take home an astonishing 22 percent of total national income, leaving too many unable to tap into the benefits of economic growth. This is not a sustainable system… not good for the economy… either.

The Daily Piketty: Kathy Geier, Michael Bird, and Tim Noah

Kathy Geier rounds up conservative critics:

Kathy Geier: What Piketty’s Conservative Critics Get WrongThe Baffler: “A conservative backlash to Piketty was inevitable…

…the only surprise is that it’s taken so long to develop…. Send in the clowns! Reihan Salam… doesn’t appear to have read a word of the book, but took it upon himself to write about it anyway…cribbing from one of the few less-than-glowing reviews of Piketty on the left, by economist Dean Baker, Salam decides he didn’t like the book because of its ‘pessimism.’ But he disagrees with Baker’s ideas about policies to fix inequality…. Earlier this week, the economist Branko Milanovic tweeted, “And the award for the stupidest review of Piketty’s book so far goes to… (no surprise there) @WSJ”… Daniel Shuchman…. I didn’t think it was possible to find a more hack-stastic review of Piketty in a major publication than the one by Shuchman. Like Milanovic, I was ready to award the dunce cap to the Journal and call it a day. But then along came Megan McArdle… one of the most extraordinary openings of a book review I have ever read:

I apologize in advance, because I am going to talk about a book that I have not yet read. To be clear, I intend to read Thomas Piketty’s “Capital in the Twenty-First Century”…

Okay then! She proceeds to argue vigorously against Piketty’s policy proposal on taxes—although, to repeat, she did not read his arguments in favor of them….

There have been more serious reviews as well…. Kevin Hassett… claims that consumption inequality is not on the rise. Nice try, but no…. Scott Winship claims that… the bottom 90 percent still experienced significant gains…. I’m skeptical…. [And] let’s be real: are we to deduce from Winship-type arguments that conservatives believe that the way to deal with inequality is to increase welfare spending, and make the tax system more fair for low-income earners?…

And Michael Bird surveys worthwhile reviews:

Michael Bird: A revue of reviews – everything you could ever want to read about Piketty’s Capital: “You may not have read French Economist Thomas Piketty’s…

…near-700 page long Capital in the Twenty-First Century, but there’s no need to worry – neither have some of the people who’ve reviewed it. Below are some of the biggest reviews…. If I’ve missed one or several that you think should be included, please leave a comment…”

And Timothy Noah adds a good, substantive review:

Tim Noah: The Dead Are Wealthier Than the Living: Capital in the 21st Century: “Patrimonial capitalism—and the landed or urban gentry living off of inherited wealth…

…was dealt a mortal blow by the Great Depression and World Wars. But it’s making a comeback, and the only way to stop it might be a worldwide tax on capital…. To belong to the landed or urban gentry of the 18th and 19th centuries—that is, to possess “books or musical instruments or jewelry or ball gowns”—you needed at least 20 to 30 times the income of the average person, and the most lucrative professions paid only half that. You needed capital, typically in the form of land. And you needed a lot of it…. Consequently, “society” (i.e., the rich) consisted almost entirely of rentiers living off inherited wealth…. Like most public-policy books, Capital is more satisfying in its diagnoses than in its prescriptions…. It’s always dangerous to project current trends into the future, but here’s one extrapolation I’ll subscribe to: predictions about the future will usually prove wrong…. We lack sufficient data to determine how, or whether, capital accumulation goes haywire in the coming years…