French Economist Piketty Clarifies Findings on Rising Inequality
French economist Thomas Piketty sought to clarify his findings on the causes of rising inequality in a new paper published in the American Economic Review.
In his best-selling book “Capital in the Twenty-First Century,” Piketty posited that the return on capital -- property, stocks, bonds and the like -- would outpace economic growth over time, tending to increase wealth inequality. He summed up that relationship in a simple equation: r>g.
Piketty said in his new paper that formula shouldn’t be seen as the “primary tool” for explaining changes in income and wealth inequality in the last century nor in forecasting what’s ahead in the current one. Other forces -- both political and economic -- also will play a major role in determining what occurs, he wrote in the article.
“One of the main conclusions of my research is indeed that there is substantial uncertainty about how far income and wealth inequality might rise in the 21st century,” he said.
“Capital in the Twenty-First Century” was hailed by Nobel-prize winning economist Paul Krugman as “the most important economics book of the year -- and maybe of the decade” after its publication in English last year. Piketty has given presentations on its findings to the White House Council of Economic Advisers, the International Monetary Fund and the United Nations.
The 43-year-old professor at the Paris School of Economics examined centuries of data on countries including the U.S., Sweden, France and the U.K. to come up with his findings.
Piketty stressed in his new article that rising inequality in the U.S. in recent decades was not due to capital accumulation by wealthy Americans -- a point he said he also made in his book.
Executive Compensation
Rather, it’s been caused by a widening gap between the labor incomes of top-earners and the rest of Americans. That in turn can be explained by “exploding” compensation for top company managers, large cuts in the maximum tax rates and more access to higher education by those better off, he said.
As for wealth inequality, Piketty said it “is currently much less extreme than it was a century ago” in the developed world. In trying to discern where it is headed, he said he had to “clarify the role played by r>g in my analysis.”The Wall Street Journal's Washington Wire is less charitable:
The gap between the return on capital and the growth of the economy “is certainly not a problem in itself,” he said. And an increase in that gap “does not have much impact on labor earnings inequality,” though it can lead to greater disparities in wealth, according to Piketty....MORE
Why Thomas Piketty’s Revisions Don’t Fix His Book
A year after the English-language edition of “Capital in the Twenty-First Century” dominated American bestseller lists, Thomas Piketty is trying to cover his retreat with an article aimed at academic economists who have largely rejected the book. In the new article, Mr. Piketty tries to guide people toward his tome’s stronger points and away from its weaknesses, which include his cavalier use and abuse of data.And even harsher on the Opinion page:
Mr. Piketty reiterates, for example, that the rise of labor inequality in the U.S. has very little to do with his central thesis, which is that when the interest rate (“r”) is greater than the growth rate (“g”), wealth inequality rises.
Sections II and IV of Mr. Piketty’s article say that simple versions of economic models do not support the claims he made in “Capital.” He argues–without using enough math to be falsifiable–that the addition of some tweaks could make the models give the results he desires. He does not say that in his book he used simple versions of the models.
One important failure in Mr. Piketty’s book was that it relied on substitutability between capital and labor that is far beyond the range supported by data. In a 2014 paper, Brent Neiman and Loukas Karabarbounis offered a defense of high substitutability (though not necessarily as high as Mr. Piketty suggests it is), based on an economy with multiple sectors. In his new article, Mr. Piketty borrows their idea, which was not available when he wrote his book. Of the approach used throughout “Capital,” Mr. Piketty now writes that it is “not [his] favored interpretation of the evidence.”
In other ways, Mr. Piketty remains consistent. His argument for why the inequality “r > g” should increase wealth inequality is tweaked in Section II but still has a central flaw: He does not deal with the fact that r and probably g are outputs of the same economic processes that create wealth.
But even the predictive value of that famous inequality goes under the revisionist’s knife....MORE
Piketty Corrects the Inequality Crowd
Here is the good Professor's website at the Paris School of Economics.
And here's "About Capital In the Twenty First century" (6 page PDF)
