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Thomas Piketty and the Financial Times

The French economist Thomas Piketty has made quite a splash with his new book Capital in the 21st Century, which is now No. 5 on Amazon’s bestseller list. That’s an amazing achievement for a book that positively bristles with charts, graphs, and abstruse economic arguments. I suspect it will be more purchased than actually read.

But the Financial Times has accused Piketty of doing a poor job with his data. I am not in a position to have an opinion on this as it involves complicated statistical analysis that is above my pay grade. But Scott Winship, a senior fellow at the Manhattan Institute, is in such a position and he’s not very impressed with the Financial Times’s analysis:

The Financial Times blew the data issues it identified out of proportion. Giles discovered a couple of clear errors and a number of adjustments that look questionable but have barely any impact on Piketty’s charts. Much of his critique could have been consigned to a footnote to the effect that he uncovered other mistakes and questionable choices that do not actually change Piketty’s results. Giles’s post is written in a way that makes you think the alleged problems with Piketty’s data are more legion than they are. And he’s made some errors himself along the way.

However, the distinguished economist Martin Feldstein, a professor at Harvard and the chairman of the Council of Economic Advisors under Ronald Reagan has other bones to pick with Piketty’s book, principally that Piketty failed to take into account how changes in American tax law affected people’s behavior and thus deeply affected the statistics:

These changes in taxpayer behavior substantially increased the amount of income included on the returns of high-income individuals. This creates the false impression of a sharp rise in the incomes of high-income taxpayers even though there was only a change in the legal form of that income. This transformation occurred gradually over many years as taxpayers changed their behavior and their accounting practices to reflect the new rules. The business income of Subchapter S corporations alone rose from $500 billion in 1986 to $1.8 trillion by 1992. …

Finally, Mr. Piketty’s use of estate-tax data to explore what he sees as the increasing inequality of wealth is problematic. In part, this is because of changes in estate and gift-tax rules, but more fundamentally because bequeathable assets are only a small part of the wealth that most individuals have for their retirement years. That wealth includes the present actuarial value of Social Security and retiree health benefits, and the income that will flow from employer-provided pensions. If this wealth were taken into account, the measured concentration of wealth would be much less than Mr. Piketty’s numbers imply.

And I certainly agree with Prof. Feldstein’s conclusion:

The problem with the distribution of income in this country is not that some people earn high incomes because of skill, training or luck. The problem is the persistence of poverty. To reduce that persistent poverty we need stronger economic growth and a different approach to education and training, not the confiscatory taxes on income and wealth that Mr. Piketty recommends.


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