French economist Thomas Piketty's book Capital in the Twenty-First Century has been inspiring a lot of comment and controversy. The English translation published last month zipped to No. 1 on amazon.com.
It has given a lift to economists on the Left who have cheered on President Obama's flagging attempts to make income inequality a voting issue. They have hailed it as “truly superb” and “extraordinarily important.”
Others, not all on the Right, have taken a jaundiced view. “All wrong” was the verdict of one. “The main argument is based on two (false) claims,” concluded another.
Piketty’s title echoes Karl Marx’s Das Kapital and his argument is similar: Returns on capital tend to exceed returns to labor, producing increasing income inequality and concentration of wealth.
That happened in the nineteenth century, he says, and is likely to happen again in the twenty-first. The twentieth century was a happy exception because of the wealth-destroying effects of two world wars and the Great Depression.
Piketty goes far beyond Obama's tepid responses -- a higher minimum wage, forgiveness of college loans -- to a red-hot remedy: an 80 percent tax on incomes above $500,000 in the United States. On global wealth, he proposes a progressive tax, topping out at two percent on fortunes greater than 5 billion euros ($6.9 billion).
That’s obviously not going to happen any time soon. But from the hosannas and harrumphs that have greeted the book — no, I haven’t read all 577 pages — certain conclusions can be drawn.
There is general agreement that Piketty has compiled an impressive array of data on income inequality in multiple nations going back 200 years or more. There is agreement also that he thoughtfully states caveats and cautions about data interpretation.
His thesis seems at least plausible at a time when the very top incomes have increased much more rapidly than those at the middle and bottom. Even some critics acknowledge that, as the Washington Post's Robert Samuelson writes, “the present concentration of income and wealth instinctively feels excessive. It understandably stirs resentment.”
But is his picture of current trends complete? The Manhattan Institute's Scott Winship points out that relying, as Piketty does, on tax returns for the U.S. statistics means omitting income from Social Security, food stamps, public housing, Medicare and Medicaid.
Tax returns count roommates and unmarried partners as separate units when they are part of a larger household. They don’t include employer-paid health insurance — an increasing share of employee compensation in recent decades.
Including these factors, Winship notes, means that incomes below the top 10 percent have not stagnated but have risen significantly since the 1970s. Increasing inequality is compatible with increases in ordinary people’s incomes.
Economist Tyler Cowen takes issue with another of Piketty’s assumptions, that the rich can earn 4 to 5 percent on their wealth “automatically, with the mere passage of time, rather than as the result of strategic risk taking.”
The French economist, Cowen says, has “a notion of capital as a growing, homogeneous blob” when in fact “sudden reversals and retrenchments are inevitable.”
Piketty concedes this is true for people with ordinary incomes. He opposes personal investment accounts in Social Security because there is too much risk of making bad investments.
His assumption that wealthy investors face no similar risks may have seemed plausible in the generation after World War II, when the Fortune 500 list of major companies remained remarkably stable.
But it has made little sense in recent years, when General Motors has gone bankrupt and Google, founded in 1998, is one of the world’s most highly valued companies.
“There's a persistent tension,” writes Bloomberg's Clive Crook, “between the limits of the data [Piketty] presents and the grandiosity of the conclusions he draws.”
Like global warming alarmists, he extrapolates from abstract theory and a few years' trend lines out a century forward -- and presents the results as inevitable.
He also presents them as justifying the confiscation, more or less, of wealth accumulated by private individuals and putting it in the hands of mandarins guided by their supposedly superior sensitivity to public welfare.
There might be less inequality in such a world, but also less economic growth and a lower, though more equal, standard of living.
“In perhaps the most revealing line of the book,” Cowen writes, “the 42-year-old Piketty writes that since the age of 25, he has not left Paris, ‘except for brief trips.’ ”
France, where a cozy elite runs government and large corporations, has a 75-percent top income tax rate and essentially zero economic growth. Is that the future American liberals want?
CLARIFICATION: Thomas Piketty calls for an 80 percent tax on incomes above $500,000 in the United States. On global wealth, he proposes a progressive tax, topping out at two percent on fortunes above 5 billion euros ($6.9 billion). This column was originally posted on April 27 and was updated at 1 p.m. April 30 to include this clarification.