Home / Blog / Article

May 1 2014

Why Piketty Gets Inequality Wrong

Rachel DiCarlo Currie

Earlier this week I discussed the limitations of the famous income data compiled by French economists Thomas Piketty (of the Paris School of Economics) and Emmanuel Saez (of UC-Berkeley). Those data are receiving fresh attention amid the hoopla surrounding Piketty’s new book, Capital in the Twenty-First Century, and Manhattan Institute scholar Scott Winship has published a superb analysis, reminding us that the Piketty-Saez figures (1) measure “tax units” rather than households (even though many individual tax filers share households), (2) exclude a large chunk of Social Security income, all non-cash government transfers (such as Medicaid, Medicare, food stamps, and housing assistance), all employer-provided fringe benefits (such as health insurance), and all non-taxable capital gains, (3) use a less-than-ideal inflation measure, and (4) fail to control for retirees. I’d like to highlight a few other smart critiques of Piketty’s argument about capitalism, inequality, and democracy.

Piketty contends that, if the rate of return on capital consistently outpaces the rate of economic growth, the result is dangerously high levels of income and wealth inequality that weaken the foundations of democracy. He fears that America and other countries are already headed in that direction. His proposed remedies include a global wealth tax and a top income-tax rate of around 80 percent.

Many analysts, including Chris DeMuth of the Hudson Institute and Kevin Williamson of National Review, note that Piketty has inadvertently made a strong case for launching private retirement accounts in Social Security. After all, if we expect the rate of return on capital to exceed the rate of economic growth, shouldn’t U.S. policymakers try to expand the ranks of the investor class?

A different critique comes from American Enterprise Institute economist Kevin Hassett, who argues that the “elasticity of substitution” between labor and capital -- that is, the extent to which labor and capital are interchangeable -- is probably much smaller than Piketty suggests. And if it is much smaller, writes AEI’s Abby McCloskey, “then capital and labor cannot easily be substituted for each other, and the collapse of capitalism that Piketty predicts does not occur.” By the same token, if Piketty is correct about the elasticity of substitution being quite large, then his proposed tax increases would be even more economically harmful. “Generally,” observes McCloskey (summarizing Hassett’s presentation), “those who support high marginal tax rates do so because they believe that elasticities are small. Piketty’s evidence and policy position, then, are inconsistent with one another.”

What about the notion that income and wealth inequality is creating veritable oligarchs? Despite rising inequality, says Washington Post columnist Robert Samuelson, the super-rich “hardly control most democracies. In the United States, where about 70 percent of federal spending goes to the poor and middle class, the richest 1 percent pay nearly a quarter of federal taxes.”

Speaking of the super-rich, Piketty’s fellow French economist Guy Sorman, a contributor editor of City Journal, makes a good point about their charitable giving and investment: “Piketty never asks if such billionaires, through philanthropy or by financing new economic activity, might spread their wealth more effectively than the government does by confiscating it. Philanthropy is non-existent in France, and it goes entirely unexplored by Piketty.”

Finally, Bloomberg View columnist Clive Crook questions the relative importance of inequality compared with that of other economic issues:

This book wants you to worry about low growth in the coming decades not because that would mean a slower rise in living standards, but because it might cause the ratio of capital to output to rise, which would worsen inequality. In the frame of this book, the two world wars struck blows for social justice because they interrupted the aggrandizement of capital. We can’t expect to be so lucky again. The capitalist who squanders his fortune is a better friend to labor than the one who lives modestly and reinvests his surplus. In Piketty’s view of the world, where inequality is all that counts, capital accumulation is almost a sin in its own right.

Over the course of history, capital accumulation has yielded growth in living standards that people in earlier centuries could not have imagined, let alone predicted -- and it wasn’t just the owners of capital who benefited. Future capital accumulation may or may not increase the capital share of output; it may or may not widen inequality. If it does, that’s a bad thing, and governments should act. But even if it does, it won’t matter as much as whether and how quickly wages and living standards rise.

That is, or ought to be, the defining issue of our era, and it’s one on which “Capital in the 21st Century” has almost nothing to say.

All of these critiques are worth reading/watching in full.

IIndependent Women's Forum is an educational 501(c)(3) dedicated to developing and advancing policies that aren’t just well intended, but actually enhance people’s freedom, choices, and opportunities. IWF is the sister organization of the Independent Women’s Voice.​
Follow us