Picking at Piketty

Thomas Piketty’s Capital in the Twenty-First Century has basically been declared the Greatest Book in the History of Ever by those on the port side of the political divide. The book declares income inequality to be a serious problem, and it prescribes massive confiscatory taxes in order to solve that problem. (I believe income immobility to be a greater problem than income inequality, but as one might imagine, Piketty ain’t buying that argument; he is too busy throwing flirting glances at Marxists and neo-Marxists to ditch the income inequality angle.) I don’t want to judge a book by its title any more than I want to judge it by its cover, but, ahem, check out the title and see if it might remind you of another famous book by another famous economist who claimed to take the side of the poor and the dispossessed.

So, just about everyone who ever had a nice thing to say about Occupy Wall Street has something nice to say about Capital in the Twenty-First Century. But there are those who believe that Piketty might–just might–be talking out of his hat.

Megan McArdle, for example, believes that Piketty offers little to nothing to help the middle class:

I am not disputing that something unhappy is going on in the global economy. Nor am I disputing that this unhappiness is unequally distributed. But the proportion of this unhappiness due to income inequality is actually relatively small — and moreover, concentrated not among the poor, but among the upper middle class, which competes with the very rich for status goods and elite opportunities.

If we look at the middle three quintiles, very few of their worst problems come from the gap between their income and the incomes of some random Facebook squillionaire. Here, in a nutshell, are their biggest problems:

  1. Finding a job that allows them to work at least 40 hours a week on a relatively consistent schedule and will not abruptly terminate them.
  2. Finding a partner who is also able to work at least 40 hours a week on a relatively consistent schedule and will not be abruptly terminated.
  3. Maintaining a satisfying relationship with that partner over a period of years.
  4. Having children who are able to enjoy more stuff and economic security than they have.
  5. Finding a community of friends, family and activities that will provide enjoyment and support over the decades.

This is where things are breaking down — where things have actually, and fairly indisputably, gotten worse since the 1970s. Crime is better, lifespans are longer, our material conditions have greatly improved — yes, even among the lower middle class. What hasn’t improved is the sense that you can plan for a decent life filled with love and joy and friendship, then send your children on to a life at least as secure and well-provisioned as your own.

How much of that could be fixed by Piketty’s proposal to tax away some huge fraction of national income from rich people? Some, to be sure. But writing checks to the bottom 70 percent would not fix the social breakdown among those without a college diploma — the pattern of marital breakdown showed up early, and strong, among welfare mothers.

Noting the economic models with which Piketty makes his arguments, Arnold Kling points out that “[t]he real world is so far removed from those models that I simply cannot buy into the undertaking.” Tyler Cowen both critiques Piketty, and points out that there are other policy proposals that might help solve the problems Piketty identifies in his book. James Pethokoukis outlines alternative policy proposals as well; naturally, those proposals are not covered in Piketty’s book.

Clive Crook is properly scathing:

. . . There’s a persistent tension between the limits of the data he presents and the grandiosity of the conclusions he draws. At times this borders on schizophrenia. In introducing each set of data, he’s all caution and modesty, as he should be, because measurement problems arise at every stage. Almost in the next paragraph, he states a conclusion that goes beyond what the data would support even if it were unimpeachable.

This tendency is apparent all through the book, but most marked at the end, when he sums up his findings about “the central contradiction of capitalism”:

The inequality r>g [the rate of return on capital is greater than the rate of economic growth] implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future. The consequences for the long-term dynamics of the wealth distribution are potentially terrifying …

Every claim in that dramatic summing up is either unsupported or contradicted by Piketty’s own data and analysis. (I’m not counting the unintelligible. The past devours the future?)

Relatedly, be sure to read Bas van der Vossen, who defends Crook from critiques by Ryan Avent, and who quite properly states that “[w]hether or not markets are fair depends in part on whether they help rise living standards. And if they do so unequally, well, maybe that is par for the course.”

Daniel Schuchman writes that Piketty’s policy prescriptions are utterly punitive in nature, and will achieve nothing for the non-wealthy:

So what is to be done? Mr. Piketty urges an 80% tax rate on incomes starting at “$500,000 or $1 million.” This is not to raise money for education or to increase unemployment benefits. Quite the contrary, he does not expect such a tax to bring in much revenue, because its purpose is simply “to put an end to such incomes.” It will also be necessary to impose a 50%-60% tax rate on incomes as low as $200,000 to develop “the meager US social state.” There must be an annual wealth tax as high as 10% on the largest fortunes and a one-time assessment as high as 20% on much lower levels of existing wealth. He breezily assures us that none of this would reduce economic growth, productivity, entrepreneurship or innovation.

I am sure that there are plenty of people who would love some of what Piketty is smoking, but cogent economic policy this ain’t. And while I can readily understand why left-of-center economists, pundits and policymakers are in love with Piketty’s book, I cannot understand why anyone who might be interested in designing and implementing smart economic policies would take Piketty’s arguments even slightly seriously.