Piketty Can’t Justify Sanders’ Fantasy Economics
French economist Thomas Piketty claims capitalist societies, with rare exceptions, see ever-increasing concentrations of wealth. Currently, we’re in a destructive self-reinforcing trend back toward 18th- and 19th-century levels of inequality, he argues using data and economic theory. Piketty’s empirical work is both clearly impressive and ultimately unreliable.
Piketty feels the natural tendency of capitalist societies is toward ever-growing wealth inequality, because the returns to capital typically remain higher than economic growth overall. Wealth inequality shrunk in the first half of the 20th century or so, he says, because of high taxation, nationalization movements, and highly destructive wars.
His solutions are a global wealth tax and an 80% income tax. Puppies and rainbows reinforced? Patrick Brennan explores.
British Wealth Data
Chris Giles, an economics editor of the Financial Times notes the sources of the data (to piketty’s credit he made public) that fit Piketty’s line, according to the British government, are supposedly not apt for these kinds of comparisons, while the data that has wealth concentration well below the trend he’s claiming — the two little dashes below the blue lines — are the right numbers.
Europe Weighted Incorrectly
Giles mounts a convincing case that Piketty has at least weighted Europe wrong. He weighted Sweden, the U.K., and France equally when the latter two are seven times the size of the first — this doesn’t look defensible the way RR’s weighting was. Here is Piketty’s calculation of the Europe inequality trend in blue, and Giles’s in red:
The most dramatic comparison comes together here. Piketty’s key chart shows rich-world wealth inequality rising since 1970:
The FT’s averaging of the data shows it’s not:
While the FT clearly points out what’s wrong with Piketty’s chart, it does not disprove his claims. Measuring inequality and reconstructing historical data is extremely hard. It’s obvious Piketty is an honest academic who admits to making errors:
As I make clear in the book, in the online appendix, and in the many technical papers I have written on this topic, one needs to make a number of adjustments to the raw data sources so as to make them more homogeneous over time and across countries. . . . I have tried in the context of this book to make the most justified choices and arbitrages about data sources and adjustments. I have no doubt that my historical data series can be improved and will be improved in the future (this is why I put everything online).
Piketty lays his historical analysis and his analysis of recent trends for income inequality in Europe on Britain, France, and Sweden. This is not “Europe” and it’s not clear it’s a representative sample. Extraordinary claims like Piketty’s require extraordinary proof and it’s questionable whether he meets that standard.
Maybe Piketty Is Right
Piketty co-authors, Emmanuel Saez, and Gabriel Zucman recently argued that wealth inequality is actually rising much faster than Piketty’s book shows. The growth has just been concentrated in the top .01 percent, they calculate (not using actual wealth data, but working back from capital gains and interest tax returns). Piketty also says that data released since the release of his book reinforces his case, so his calculations were actually conservative.
Proving that income inequality is rising in the United States and in most wealthy countries is relatively easy to prove. Rather, Piketty wanted to show that this plays into a loop with increasing wealth that needs to be arrested by huge global interventions. Seems specious.
One common objection to Giles’s skepticism has been that increasing wealth inequality is simply an obvious fact of this world and we don’t need data to back it up. Well, Piketty needs the data to back up the arguments he made, being that wealth inequality is not just high or rising, but to be returning to 19th-century levels as a matter of economic inevitability.
Social science has its skeptics except when it provides a result that they find ideologically appealing. Reductionism is convenient but incomplete, and to some extent we have to rely on experts to help us understand the world. Piketty, like Bernie Sanders, certainly is not infallible.