Wednesday, July 02, 2014

A very simple point

I have been resisting any impulse to pick up and get into my copy of Thomas Piketty's Capital.  One reason is that it has been reviewed more than any (new) book I know. Having digested many of these reviews, I fear that I have been compromised.

One review that I found exceptionally well done is by Jonah Goldberg in the recent Commentary. Here is a passage that I would have placed at the beginning (but do read the whole thing):
Nor are the poor and the middle class static. As a statistical artifice, there will always be a bottom 1 percent, just as there will always be a top 1 percent. But that doesn’t mean that if you are born in the bottom 1 percent, you will stay there. Some of Piketty’s fans seem confused about this, appearing to believe that economic inequality is synonymous with low economic mobility. There may indeed be a link between inequality and low economic mobility. After all, rich people by definition have advantages poor people do not. But there is no iron law that says any individual person must stay in his narrow economic bracket for life; the Morlocks can become Eloi. Indeed, there remains an enormous amount of churn in our economy; 61 percent of households will find themselves in the top quintile of income for at least two years, according to data compiled by economists Mark Rank and Thomas Hirschl. Just under 40 percent will reach the top 10 percent, and 5 percent will be one-percenters, at least for a while.

Piketty himself offers an extensive analysis of the Forbes list of the wealthiest people in the world in an attempt to prove that today’s richest people are much richer than they were in 1987 and that the “largest fortunes grew much more rapidly than average wealth.” He says the data show that wealth grew by an inflation-adjusted 7 percent, even higher than the normal 4-to-5 percent return implicit in r > g. In what seems a generous nod, Piketty even concedes that if you jigger the timespan—starting from, say, 1990 instead of 1987—the rate of return might drop a bit. But one problem remains: Piketty leaves out that the people on the list are almost all different people.3 The economist Stan Veuger, writing for U.S. News & World Report, looked at the same list and found that the top 10 individuals collectively earned about 0.5 percent on their capital during the period Piketty says “the rich” got richer. And, Vueger notes: “If it weren’t for Walmart, the wealthiest people in the world would actually have lost about half of their wealth in the last 25 years.”
The point has been made many times but remains an often ignored "inconvenient fact."  We are not living in feudal times but in a very dynamic age.  There is great flux.  There is mobility between strata.  Perhaps not enough but not insignificant either. Yet, there are studies and opinion pieces that compare a distribution snapshot in Year A with another distribution snapshot in Year B -- and infer that inequality has worsened. Unless we have a way to track individuals (panel data), this approach is meaningless.

It is also clear that the most mobile are those who cross the border into the U.S. They are necessarily missing from the much of the data and analysis.

Is wealth accumulation mainly via ill-gotten gains? Is this what incites the redistributionists? Inevitably, there is some of that and the place to start is to rein in the crony capitalists (be they in government or in business). But go back to the mobility stats.  The new rich are likely to be associated with successful start-ups and innovation. I do not begrudge them anything.

We cannot magically delete all of the "worsening inequality" studies that are not based on mobility data. Pikkety's Fig 1.1 shows the share on U.S. income going to the top decile in each census year 1910-2010. That decile changed membership many times over the last 100 years.