Playing a variant of "the debate is over", Paul Krugman lauds the new Pikkety book while ignoring and deriding the critics:
The Piketty Panic
“Capital in the Twenty-First Century,” the new book by the French economist Thomas Piketty, is a bona fide phenomenon. Other books on economics have been best sellers, but Mr. Piketty’s contribution is serious, discourse-changing scholarship in a way most best sellers aren’t. And conservatives are terrified. Thus James Pethokoukis of the American Enterprise Institute warns in National Review that Mr. Piketty’s work must be refuted, because otherwise it “will spread among the clerisy and reshape the political economic landscape on which all future policy battles will be waged.”
Well, good luck with that. The really striking thing about the debate so far is that the right seems unable to mount any kind of substantive counterattack to Mr. Piketty’s thesis. Instead, the response has been all about name-calling — in particular, claims that Mr. Piketty is a Marxist, and so is anyone who considers inequality of income and wealth an important issue.
I’ll come back to the name-calling in a moment.
Let me save you the suspense:
So what’s a conservative, fearing that this diagnosis might be used to justify higher taxes on the wealthy, to do? He could try to refute Mr. Piketty in a substantive way, but, so far, I’ve seen no sign of that happening. Instead, as I said, it has been all about name-calling.
I guess this shouldn’t be surprising. I’ve been involved in debates over inequality for more than two decades, and have yet to see conservative “experts” manage to dispute the numbers without tripping over their own intellectual shoelaces. Why, it’s almost as if the facts are fundamentally not on their side.
Whither The Bottom 90 Percent, Thomas Piketty?
While Piketty’s efforts to improve our understanding of income concentration have been invaluable, the tax-return-based estimates that he and others have compiled are not without problems for certain applications.
Basically, the tax data is more useful for very high incomes but much worse for the 90 percenters:
At the same time, it is no less true that tax return data cannot be used to assess trends in income below the top—at least in the U.S., and I suspect elsewhere. The Piketty and Saez data for the U.S. indicate that between 1979 and 2012, the bottom 90 percent’s income dropped by over $3,000. However, the official Census Bureau estimates indicate that the bottom 80 percent of households saw an increase of nearly $3,500. Median income—the income of the household in the middle of the distribution—rose by $2,500. If you are underwhelmed by these initial differences, stick around.
Lowest Second Third Fourth Highest Top 5 Top 5 Year fifth fifth fifth fifth fifth percent percent* -------- -------- -------- -------- -------- -------- -------- -------- 2012 Dollars 1979 11,808 29,369 48,422 71,060 127,526 194,491 214,767 2012 11,490 29,696 51,179 82,098 181,905 318,052 433,937
These are in inflation-adjusted 2012 dollars (the nature of the inflation adjustment can be improved, as Mr. Winship explains), but pressing on, I see a decrease for the bottom quintile of ($318), an increase for the next quintile of $327, an increase for the middle quintile of $2,757, and an increase for the fourth quintile of $11,038. That sums to a lot more than the $3,500 cited by Mr. Winship. In fact, if he is describing only the bottom three quintiles the increase is $2,765. Either number buttress his argument, but confusion about his numbers weakens it. [Wow, my bad - obviously, I need to average the four quintiles, not sum them, which gets me back to $3,500. Scary. They say this coffee is half-caf, but I suspect it is half-decaf.]
So why should we favor the Census Bureau numbers?
The Census Bureau figures are superior to the Piketty and Saez estimates when looking below the top ten percent in two ways. First, the measure of income derived from tax returns excludes a significant amount of income, and people below the top are disproportionately recipients of that income. Most importantly, in the United States, most public transfer income is omitted from tax returns. That includes not just means-tested programs for poor families and unemployment benefits, but Social Security. Many retirees in the Piketty-Saez data have tiny incomes because their main source of sustenance is rendered invisible in the data. The Census Bureau figures include some transfers, though even they omit non-cash transfers like food stamps, school lunches, public housing, Medicare, and Medicaid.
You might think that that means the Piketty-Saez data still does a good job capturing “market income”—what people make before the government steps in to redistribute. But their data also excludes non-taxable capital gains (such as those accruing to middle-class households when they sell a home), employer benefits (like health insurance), and other sources of non-taxable income. More subtly, it is impossible to get an accurate read on trends in market income concentration when retirees (with little to no market income) are included in the data (as they always are). The share of retirees has been growing for some time, and that puts downward pressure on the market income trend.
Hmm. There are other wrinkles:
The second reason that tax return data are inferior to Census Bureau estimates for incomes below the top is that tax returns—or “tax units,” which essentially means potential tax returns if everyone filed—are different from households. The Piketty and Saez data include as tax units all returns filed by dependent teenagers with summer jobs and undergraduates with work-study positions. They count roommates and unmarried partners as separate tax units rather than as one household, ignoring all of the shared living expenses that make living with someone cheaper than living alone. As a consequence, incomes are much lower among tax units than among households.
So when my seventeen year old got a summer job and filed a tax return he was contributing to the gloomy income inequality statistics in America? I did not know that. Nor, based on the lack of changes in his lifestyle, did he.
It’s also worth reiterating that there are ways of improving on income measurement that none of the above figures incorporate. Income trend estimates should account for declines in household size—fewer mouths to feed for a given income—and they should use a better cost-of-living adjustment. When I raised these issues with Saez recently on a conference panel in which we both participated, he agreed that in principle, incomes should be size-adjusted, though he favored adjusting them according to the number of adults rather than the convention of adjusting by the number of adults and children. He also agreed that the inflation measure favored by the Congressional Budget Office and targeted by the Federal Reserve Board (the “Personal Consumption Expenditures deflator”) is more appropriate than the adjustment used by the Census Bureau and by himself and Piketty.
Another improvement to the above income estimates would incorporate non-cash public benefits and employer-provided health insurance. Finally, particularly if we are concerned about inequality, income measures should account for the redistribution that occurs through progressive taxation (as Piketty and Saez have done in less-cited work).
And some bottom-lining:
When I incorporate these improvements using the Census Bureau data, I find that median post-tax and -transfer income rose by nearly $26,000 for a household of four ($13,000 for a household of one) between 1979 and 2012. If you don’t like the household-size adjustment, the non-adjusted increase was over $20,000 at the median. If you think that valuing health care as income is problematic, that figure drops to $10,400 under the implausible assumption that third-party health care benefits have no value to households. The income of the bottom 90 percent rose nearly $12,000 under that assumption instead of dropping by $3,000 as in the Piketty and Saez data, and it rose by nearly $21,000 if health benefits are included. For a household of four, median market income for non-elderly households (not counting employer-provided health care as income) rose $9,400.
That suggests the Pikkety effort may be disoriented:
In short, Piketty seems to draw too strong a conclusion (“terrifying,” in his words) about what continued rising inequality would entail for the bottom 90 percent (at least in the U.S.). Rising income concentration has not been accompanied by stagnation below the top, and there is no reason to think that it will be in the future. (In fact, there are reasons to think that income concentration might level off in the future and incomes lower down might rise more robustly, a point to which I will return in a future post. Those of you who heard my question at Piketty’s Tax Policy Center event already can anticipate it.)
The Winship effort lacks the snark we had expected from Krugman's typically thoughtfully commentary. However, back in 2011 I penned a snark-filled blast at Ezra Klein noting the many problems with the "rising inequality" figures, so maybe that will do. The Times (eventually) mentioned the similar result of a Burkhauser paper from June 2011. From the Times:
Research led by the Cornell economist Richard V. Burkhauser, for instance, sought to measure the economic health of middle-class households including income, taxes, transfer programs and benefits like health insurance. It found that from 1979 to 2007, median income grew by about 18.2 percent over all rather than by 3.2 percent counting income alone.
Mr. Winship takes another bite of the apple here, explaining the many and subtle problems with tax data and capital gains. This passage inspires a mini-rant:
Since top income tax rates have fallen since the 1970s, the concern is that the incentives for tax avoidance and evasion have fallen. That would cause more income to show up on tax returns rather than being hidden in tax-exempt or tax-deferred forms, or otherwise sheltered from the view of the IRS. In other words, it is possible that part of the apparent increase in income concentration is simply the result of a more transparent picture of incomes at the top. Combine that with the capital gains issue, and it is easy to imagine that Piketty’s view of income concentration trends may be distorted by shortcomings of the data.
Back when income tax rates were much higher executives had country club memberships paid for (for entertaing, natch), a generous expense account that was only lightly monitored, company cars, and all sorts of perks that amounted to untaxed compensation. Malcolm Forbes was famous for his "business" entertaining on sumptuous yachts operated as a business expense; the executives at RJR were bought off by corporate jets, and I like this mini-review of Barbarians At The Gates, about the RJR takeover:
It is incredible to hear about the shear amount of corporate excess that Russ Johnson (CEO of RJR Nabisco) created at the firm with the company covering his golf club memberships at 12 different clubs (one of which including the famous DeepDale course), 8 corporate jets that he allowed any of his friends and directors to use, corporate apartments he had the company pay for him, and trips to NYC that he would have the company pay for to foot his expensive food and drink bill.
Hmm, "shear" like in sheep? Maybe! But none of that compensation showed up on his taxes, so go puzzle on that, Mr. Pikkety. [Mickey Kaus wrote on actual receipts versus high marginal tax rates back in 2012; Tyler Cowen comments on Pikkety here and at Foreign Affairs.]
Clive Crook at Bloomberg takes aim at the premise that capital concentrations can only increase, and delivers the most amusing line I have seen in this debate. He quotes Pikkety:
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 ...
However, says Mr. Crook:
[C]apital will outpace the economy only if owners of capital save a sufficiently large part of the income they derive from it. (Suppose they save none of it: Their wealth won't grow at all.)
History is oddly reassuring:
Wolf offers this clarification: Piketty "argues that the ratio of capital to income will rise without limit so long as the rate of return is significantly higher than the economy’s rate of growth. This, he holds, has normally been the case." That's better: The gap between r and g has to be "significant." The bigger the gap, the more likely it is that saving will build capital faster than output rises -- and Piketty does show that the gap usually has been big.
The trouble is, he also shows that capital-to-output ratios in Britain and France in the 18th and 19th centuries, when r exceeded g by very wide margins, were stable, not rising inexorably. The same was true of the share of national income paid to owners of capital. In Britain, the capitalists' share of income was about the same in 1910 as it had been in 1770, according to Piketty's numbers. In France, it was less in 1900 than it had been in 1820.
What about the 21st century? Perhaps the capitalists' share will rise inexorably in future -- and that's what matters.
Perhaps it will, but Piketty advances reasons to doubt this too. He expects r to be a bit lower and g a bit higher than their respective historical averages. There are many other factors to consider, as he says, but on his own analysis the chances are good that the future gap between return on capital and growth will be smaller than the gap that failed to produce an inexorably rising capital share in the two centuries before 1914.
And a punchline:
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.
Maybe global warming can provide the devastation of a world war or two. Here's hoping!
Kevin Hasset of the AEI delivers many snark-free thoughts. My takeaway - the growth in the capital-to-income ratio in the rich countries has been primarily in the housing stock; concentrations of productive capital are not dramatic.
That is a bit of a reading list for the prof. I assume Krugman will want to find some foolish comment from some unknown Congressman (or shock jock!) and claim that it exemplifies the entire conservative reaction.
I CAN QUIT ANYTIME: This from Krugman's column is a burr under my saddle:
For the past couple of decades, the conservative response to attempts to make soaring incomes at the top into a political issue has involved two lines of defense: first, denial that the rich are actually doing as well and the rest as badly as they are, but when denial fails, claims that those soaring incomes at the top are a justified reward for services rendered. Don’t call them the 1 percent, or the wealthy; call them “job creators.”
I'd feel a lot better about adopting the socialism of Pikkety's proposed global wealth tax if its advocates could point to a system anywhere that was advancing the human condition as successfully as the quasi-market capitalism that is moving the ball today.
SOCIAL CAPITAL TRANSFERS: David Brooks thinks this is a scuffle between the holders of financial and cultural capital:
If you are a young professional in a major city, you experience inequality firsthand. But the inequality you experience most acutely is not inequality down, toward the poor; it’s inequality up, toward the rich.
You go to fund-raisers or school functions and there are always hedge fund managers and private equity people around. You get more attention than them at parties, but your whole apartment could fit in their dining room. You struggle with tuition, but their kids go off on ski weekends. You wait in line at the post office, but they have staff to do it for them.
You see firsthand the explosion of wealth at the tippy-top. It really doesn’t help that you have to spend your days kissing up to the oligarchs and their foundations to finance your research, exhibition or favorite cause.
Think of Bill Clinton before he made his hundred million and had to rely on the kindness of rich strangers to enjoy a summer getaway. Where's the justice - do we know who he is?!?
However, Mr. Brooks goes awry here:
This is a moment when progressives have found their worldview and their agenda. This move opens up a huge opportunity for the rest of us in the center and on the right. First, acknowledge that the concentration of wealth is a concern with a beefed up inheritance tax.
The inheritance tax prompts the super-rich to put their money in a foundation with their heirs in charge. In the longer term progressives can capture these pots of money, since spending other people's money is what they do. But in the short run, the heirs will enjoy the power associated with controlling the distribution of great wealth even though they don't formally "own" it. Does anyone think that the heirs of Bill and Melinda Gates will lack for Davos invitations, White House dinners, or lovely vacations just because they no longer "own" a big chunk of Microsoft but merely sit on the board of the Gates Foundation? Please.
Or try this - suppose the Dreaded Koch Brothers did a NY Times like reorganization of their hodlings so that they retained voting control of their enterprises but the bulk of the (newly-created, non-voting) dividend-paying shares were tossed into the various Koch family foundations directed by the same evil brothers and their spawn. Would liberals cheer this dissipation of wealth? Why not - per the Pikkety numbers it would be a blow for income equality.