Results for “Piketty”
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The Piketty-Saez-Zucman response to Auten and Splinter

A number of you have asked me what I think of their response.  The first thing I noticed is that Auten and Splinter make several major criticisms of PSZ, and yet PSZ respond to only one of them.  On the others they are mysteriously silent.

The second thing I noticed is that PSZ have been trying to deploy the slur of “inequality deniers” against Auten and Splinter.  I take that as a bad epistemic sign.

I was in the midst of writing a longer post, but then I received the following from Splinter, and I cannot come close to his efforts or authority:

Here is a short response to yesterday’s comments by Piketty, Saez, and Zucman (PSZ) on Auten and Splinter (forthcoming in JPE). These are variations on prior comments that Jerry and I addressed in 2019 and 2020. 

First, PSZ say audit data suggest adding underreported income implies little change in top 1% shares. We agree. But their approach increases recent top 1% shares about 1.5 percentage points, with about 50% of underreported business income going to the top 1% by reported income. However, Johns and Slemrod (2012) found only 5% of underreporting went to the top 1% by reported income. This discrepancy is because PSZ allocate underreported income proportional to reported positive income, which ignores that a substantial share of business underreporting (about 40%) goes to individuals with reported negative total income, where misreporting rates are the highest (Table B3 here). The concentration of underreporting at the bottom of the reported distribution causes substantial upward re-ranking when adding underreported income, but that’s mostly ignored in the PSZ approach. The PSZ approach also implies that someone who decreases their underreporting rate by increasing their reported income is allocated more underreporting. That’s backwards. 

In contrast, our approach fits prior estimates from audit data, makes use of many years of audit data, and improves upon prior approaches. We find that underreported income slightly lowers top 1% pre-tax income shares and slightly increases after-tax income shares (Figure B6 here), which is consistent with the audit data. For example, 16% of underreporting is in our top 1% ranked by true income, far less than PSZ’s near 50%-allocation and a bit under the 27% in Johns and Slemrod because we improve upon prior approaches that misallocate undetected underreporting (discussion here). Contrary to the assertions and approach of PSZ, our Figure B5 (bottom panel, here) shows­ that re-ranking between reported and true (reported plus underreported) income matters substantially. PSZ appear confused about the difference between ranking by reported versus true income. Our underreporting allocations (as are theirs) must be based on reported income because that is all one observes with the primary tax data we both use. But, unlike their method, our allocations are done such that we match the re-ranking implied by audit data. Therefore, we match both the distributions by reported and true income after re-ranking (top two panels of Figure B5, here). 

Second, income missing from individual tax returns has shifted from the top to outside the top. The shift from the top was from movements out of closely-held C corporations, whose income is missing from individual tax returns, to passthrough businesses, whose income is on individual tax returns. This created growth in the top share of taxed business income. The growth in PSZ’s top share of untaxed business income, however, is due to their skewed allocation of underreported income that re-allocates underreported income to the top of the distribution. Outside the top, the growth of missing income is from increasing tax-exempt employee compensation, especially from health insurance (see Figure B16 here).

Third, PSZ suggest that top wealth and capital income shares should run parallel over the long run. This is a problematic assumption. Economic changes can push down capital income shares relative to wealth shares. For example, interest rates fell dramatically between 1989 and 2019—the federal funds effective rate fell from 9 to 2 percent. This tends to decrease the ratio of interest-income to bond-wealth and therefore falling interest rates likely increased the gap between top income and wealth shares. Also, much of top wealth patterns are driven by passthrough business, but this is fully or two-thirds excluded from PSZ’s definition of “capital” income here. When fully including passthrough business, the Auten–Splinter top 1% non-housing “capital” income share increased by 5 percentage points between 1989 to 2019, about two-thirds the Federal Reserve’s estimated increase in top 1% wealth shares. Therefore, the Auten-Splinter estimates are broadly consistent with increasing top wealth shares.

 The Auten–Splinter approach is fundamentally a data-driven approach (Table B2 here). Based on Saez and Zucman’s (2020) suggestions and conversations, our more recent work adds new uses of data to account for high-income non-filers, flexible spending accounts, and depreciation issues from expensing. Where we rely on assumptions, alternative ones suggest top 1% shares change little, see Table 5. Our headline finding of relatively flat long-run top 1% after-tax income shares is robust.

Auten and Splinter had presented versions of those points previously, as they note.  Yet PSZ present them as naive fools who somehow forgot to think about these issues at all, and PSZ do not, in their reply, consider these more detailed presentations of the point and defenses of the  Auten-Splinter estimates.  So I don’t think of the PSZ response as especially strong.

Here are relevant Auten and Splinter points from back in 2020.  Phil Magness offers commentary.

My excellent Conversation with Thomas Piketty

Lots of disagreement in this episode, though always polite.  Here is the transcript, video, and audio.  Here is part of the summary:

He joined Tyler to discuss just how egalitarian France actually is, the beginning of the end of aristocratic society, where he places himself within French intellectual history, why he’s skeptical of data from before the late 18th century, how public education drives economic development, why Georgism isn’t sufficient to address wealth inequality, the relationship between wealth and cultural capital, his proposal for a minimum inheritance, why he turned down the Legion of Honor, why France should give reparations to Haiti despite the logistical difficulties of doing so, his vision for European federalism, why more immigration won’t be a panacea for inequality, his thoughts on Michel Houellebecq’s Submission, and more.

Here is one excerpt:

COWEN: If I visit every major country in Europe, what I observe is the highest living standard is arguably in Switzerland — Norway and Luxembourg aside. Switzerland has one of the smallest governments, and they attempt relatively little redistribution. What is your understanding of Switzerland? What if someone said, “Well, Europe should try to be more like Switzerland. They’re doing great.” Why is that wrong?

PIKETTY: Oh, Switzerland. It’s a very small country, so it’s about the size. . . . Actually, it’s smaller than Île-de-France, which is a Paris region. Now, if you were to make a separate country out of Île-de-France, GDP per capita, I think, would actually be higher than Switzerland. Of course, you can take a wealthy region in your country and say, “Okay, I don’t want to share anything with the rest of the country. I’m going to keep my tax revenue for me. I’m going to be a tax haven based on bank secrecy.” That’s going to make you 10 percent or 20 percent richer. I’m not saying —

COWEN: It’s been a long time since Switzerland relied on bank secrecy, right? Following 9/11, that Swiss advantage largely went away.

PIKETTY: Oh, that’s wrong. Oh, you’re wrong on this.

We talk about Matt Rognlie and Greg Clark as well.  Recommended, this was fun for me to reread.

*Capital and Ideology*, by Thomas Piketty

This book is more than 1000 pp., here are my impressions:

1. About 600 pp. of this book is a carefully done history of the accumulation and sometimes dissipation of wealth and property.  You can evaluate that material without reference to any particular set of political views.

2. At some point the book veers into partisan issues such as the wealth tax.  Many of those parts remain interesting, but it also becomes clear that Piketty is “out to lunch,” to wit (p.591):

To return to the Soviet attitude toward poverty, it is important to try to understand why the government took such a radical stance against all forms of private ownership of the means of production, no matter how small.  Criminalizing carters and food peddlers to the point of incarcerating them may seem absurd, but there was a certain logic to the policy.  Most important was the fear of not knowing where to stop.  If one began by authorizing private ownership of small businesses, would one be able to set limits?

I can think of a less naive explanation of Soviet attitudes toward the private sector.  Piketty also calls for “participatory socialism” (p.592), a dubious doctrine not to be confused with say Nordic social democracy.  For instance, Sweden (among other countries) seems to have fairly extreme wealth inequality.

3. The sentence “Real wages are much higher in America than in Western Europe” does not come easily to his pen.  Nor does “The United States is a remarkably successful innovator, let’s see what we can learn from that.”  Or even “Raising wages is more important than merely limiting inequality.”  Those seems to be banished thoughts in the Piketty intellectual universe.

4. The sections on Soviet and socialist experience can only be called “delusional.”  In his account, if only a few political decisions had gone the other way, the USSR might have ended up on a path similar to that of Norway (p.603 and thereabouts).

You know, maybe you think that the inequalities of the current day are much worse than people had been expecting.  but that should not revise your view of socialism and the Soviet Union, two matters fairly well settled by historical research.

5. Give these lenses, it is impossible for Piketty to offer any commentary on recent events (about the last 400 pp. of the book) that is anything other than distorted and unreliable.  There is massive distrust of the wealthy in this book, and virtually no distrust of concentrated state power.

6. There is a considerable sum of useful and valuable material in this book, and I would not try to dissuade anyone inclined from reading it.  Nonetheless I suspect its main import is as another sign of the growing compartmentalization of academic discourse — good work intermingled with highly questionable partisan material — and how so many academics, if the mood affiliation tilts in the right direction, will tolerate or even encourage that.

You can pre-order the book here.

Henry George, Swift, and Piketty go to the movies (premises discussed, but no spoilers)

Yes, I’m talking about Downsizing, starring Matt Damon.  If Henry George is right about exorbitant rents and land scarcity, of course the solution is to shrink the people, thereby creating in real terms more land (plus solving a lot of environmental problems).  In this movie, shrinking people to a few centimeters tall raises the value of a dollar by about 1000x — how’s that for a Georgist result?  The small people live in splendid houses, massive relative to their diminutive size, and can eat all the gourmet food they want because they need only a snippet of foie gras or for that matter a very small piece of diamond.  Yet they still must interact (badly) with the larger world, thus the Swift connection.  How about Piketty?  Well, the small people have trouble mastering nature or producing for the larger outside world, so they are dependent on their preexisting wealth.  The wealth to income ratio is remarkably high, and woe unto anyone who has to rely on labor income in the “small world.”

Then the movie starts!  It’s an uneven film in a number of ways, still for economics “food for thought,” or for that matter social critique, I haven’t seen anything nearly as good for a while.

Is Piketty’s Data Reliable?

When Thomas Piketty’s Capital in the Twenty-First Century first appeared many economists demurred on the theory but heaped praise on the empirical work. “Even if none of Piketty’s theories stands up,” Larry Summers argued, his “deeply grounded” and “painstaking empirical research” was “a Nobel Prize-worthy contribution”.

Theory is easier to evaluate than empirical work, however, and Phillip Magness and Robert Murphy were among the few authors to actually take a close look at Piketty’s data and they came to a different conclusion:

We find evidence of pervasive errors of historical fact, opaque methodological choices, and the cherry-picking of sources to construct favorable patterns from ambiguous data.

Magness and Murphy, however, could be dismissed as economic history outsiders with an ax to grind. Moreover, their paper was published in an obscure libertarian-oriented journal. (Chris Giles and Ferdinando Giugliano writing in the FT also pointed to errors but they could be dismissed as journalists.) The Magness and Murphy conclusions, however, have now been verified (and then some) by a respected figure in economic history, Richard Sutch.

I have never read an abstract quite like the one to Sutch’s paper, The One-Percent across Two Centuries: A Replication of Thomas Piketty’s Data on the Distribution of Wealth for the United States (earlier wp version):

This exercise reproduces and assesses the historical time series on the top shares of the wealth distribution for the United States presented by Thomas Piketty in Capital in
the Twenty-First Century….Here I examine Piketty’s US data for the period 1810 to 2010 for the top 10 percent and the top 1 percent of the wealth distribution. I conclude that Piketty’s data for the wealth share of the top 10 percent for the period 1870 to 1970 are unreliable.
The values he reported are manufactured from the observations for the top 1 percent inflated by a constant 36 percentage points. Piketty’s data for the top 1 percent of the distribution for the nineteenth century (1810–1910) are also unreliable. They are based
on a single mid-century observation that provides no guidance about the antebellum trend and only tenuous information about the trend in inequality during the Gilded Age. The values Piketty reported for the twentieth century (1910–2010) are based on more
solid ground, but have the disadvantage of muting the marked rise of inequality during the Roaring Twenties and the decline associated with the Great Depression. This article offers an alternative picture of the trend in inequality based on newly available data and a reanalysis of the 1870 Census of Wealth. This article does not question Piketty’s integrity.

You know it’s bad when a disclaimer like that is necessary. In the body, Sutch is even stronger. He concludes:

Very little of value can be salvaged from Piketty’s treatment of data from the nineteenth century. The user is provided with no reliable information on the antebellum trends in the wealth share and is even left uncertain about the trend for the top 10 percent during
the Gilded Age (1870–1916). This is noteworthy because Piketty spends the bulk of his attention devoted to America discussing the nineteenth-century trends (Piketty 2014: 347–50).

The heavily manipulated twentieth-century data for the top 1 percent share, the lack of empirical support for the top 10 percent share, the lack of clarity about the procedures used to harmonize and average the data, the insufficient documentation, and the spreadsheet errors are more than annoying. Together they create a misleading picture of the dynamics of wealth inequality. They obliterate the intradecade movements essential to an understanding of the impact of political and financial-market shocks on inequality. Piketty’s estimates offer no help to those who wish to understand the impact of inequality on “the way economic, social, and political actors view what is just and what is not” (Piketty 2014: 20).

One of the reasons Piketty’s book received such acclaim is that it fed into concerns about rising inequality and it’s important to note that Sutch is not claiming that inequality hasn’t risen. Indeed, in some cases, Sutch argues that it has risen more than Piketty claims. Sutch is rather a journeyman of economic history upset not about Piketty’s conclusions but about the methods Piketty used to reach those conclusions.

Piketty, Housing, and Capital Share

Gianni La Cava has a very interesting article (based on a longer paper) on what accounts for the rising share of capital in the income accounts:

A key observation in Thomas Piketty’s Capital in the Twenty-First Century (Piketty 2014) is that the share of aggregate income accruing to capital in the US has been rising steadily in recent decades. The growing disparity between the income going to wage earners and capital owners has led to calls for government intervention. But for such interventions to be effective, it is important to ask who the capital owners are.

Recent research has shown that the long-run rise in the net capital income share is mainly due to the housing sector (e.g. Rognlie 2015, Torrini 2016 – see Figure 1). This phenomenon is not specific to the US but has been evident in almost every advanced economy. This suggests that it is not entrepreneurs and venture capitalists that are taking an increasing share of the economy, but land owners.

…The decomposition of the national accounts by type of housing indicates that the secular rise is mainly due to a rising share of imputed rent going to owner-occupiers. The owner-occupier share of aggregate income has risen from just under 2% in 1950 to close to 5% in 2014 (top panel of Figure 2). The share of income going to landlords (i.e. market rent) has also doubled in the post-war era. But, in aggregate, the effect of imputed rent is larger simply because there are nearly twice as many home owners as renters in the US economy. A similar phenomenon is observed in the personal consumption expenditure data (bottom panel of Figure 2). In other words, today’s landed gentry are predominantly home owners, not private landlords.

…The geographic decomposition reveals that the long-run rise in the housing capital income share is fully concentrated in states that face housing supply constraints. To see this, I divide the states into ‘elastic’ and ‘inelastic’ groups based on whether the state is above or below the median housing supply elasticity index (as measured by Saiz 2010). This index captures both geographical and regulatory constraints on home building across different US regions. For 50 years, the share of total housing capital income going to the supply-elastic states has been unchanged at about 3% of GDP (Figure 3). In contrast, the share going to the supply-inelastic states has risen from around 5% in the 1960s to 7% of GDP more recently. Notably, these divergent trends in housing capital income are not due to a few ‘outlier’ states where housing supply is particularly constrained, such as New York or California – instead, there is a clear negative correlation between the long-run growth in housing capital income and the extent to which housing supply is constrained across all states (Figure 4).

Kenneth Arrow on Piketty

Here is the closing paragraph of his short but interesting piece:

We might be especially moved to consider a consumption tax if we consider that Piketty’s proposed wealth tax seems in any case to be much higher than it sounds. If we are to assume, say a 5% return on property, then a 2% per annum tax on wealth would amount to about 40% of property income. If investment is financed by property income, this implies a very considerable reduction in investment. Is this desirable? One might doubt it, especially since the effects on investment would be substantial, even apart from incentive effects, which might also be quite considerable.

I would stress that a capital gains tax — not indexed for inflation — shares many properties of a wealth tax.  In recent academic debates, this point about wealth taxes is not being made nearly enough.

Matt Rognlie on Piketty, net capital returns, and housing

Brookings emails me:

Capital income is not growing unboundedly at the expense of labor, and further accumulation of capital in fact most likely means a fall in capital’s share of total income – refuting one of the main theories of economist Thomas Piketty’s popular book Capital in the 21st Century — according to a paper presented today at the Spring 2015 Conference on the Brookings Papers on Economic Activity (BPEA).

Existing studies that show an increase in capital’s share of income miss the growing role of depreciation in short-lived capital, in items such as software, says MIT’s Matthew Rognlie in “Deciphering the Fall and Rise in the Net Capital Share.”  Rognlie subtracts depreciation in seven large developed economies (the US, Japan, Germany, France, the UK, Italy, and Canada) to get net capital income, and finds that the only long-term rise in capital’s share of income is in housing. Capital income elsewhere in the economy has grown moderately, but it is only recovering from a large fall that lasted from 1948 through the 1970s.

Piketty’s Capital argues that the role of capital in the economy, after falling during the Depression and two world wars, is set to recover to the high levels of the 19th and early 20th centuries. According to Piketty, wealth will accumulate amid slowing economic growth to push up the capital-to-GDP ratio in the economy, which will then cause an increase in capital’s share of income — and growing inequality.

In contrast, Rognlie finds that a rising capital-to-GDP ratio is most likely to result in a fall in capital’s share of income, since the net rate of return on capital will fall by an even larger proportion than the capital-to-GDP ratio rises. Outside of housing, postwar changes in the value of the capital stock have not led to parallel changes in capital’s share of income. In fact, the value of the capital stock relative to private income reached its highs in the late 1970s and early 1980s, when capital’s share of income was near a low.

Rognlie shows that the share of net income generated by housing has risen in all seven large developed economies since data became available. “Housing’s central role in the long-term behavior of the aggregate net capital share has… not been emphasized elsewhere…Observers concerned about the distribution of income should keep an eye on housing costs,” he writes.

Brad DeLong offers comment.

Here Jim Tankersley has a superb profile of Rognlie and the story behind his comment, MR plays a role too.  Recommended.

Human capital, wealth, and Piketty’s calculations

David N. Weil has a new paper on this topic, and it makes some interesting points, here is one:

Net Social Security wealth of currently living Americans in 2013 was $12.9 trillion, or three quarters of a year’s GDP.

More generally he makes this point:

In 1700, at the beginning of the period that he studies in his book, marketable assets were indeed pretty much the only form of wealth.  But over the intervening 300 years, new types of wealth, most notably human capital and transfer wealth, have come to constitute a very significant fraction of total wealth.  Thus the constancy of the wealth/income ratio as portrayed in his data is an illusion.  More important, however, is the fact that the distribution of the new types of wealth that he does not measure is far more equal than, and not perfectly correlated with, wealth that falls into his analysis.

The paper is interesting throughout, the NBER version is here.  The top link here leads you go an ungated pdf.

Addendum: In a new essay Piketty responds to critics.

Thomas Piketty refuses France’s highest honor

France’s influential economist Thomas Piketty, author of “Capital in the 21st Century”, on Thursday refused to accept the country’s highest award, the Legion d’honneur, to criticise the Socialist government in power.

“I refuse this nomination because I do not think it is the government’s role to decide who is honourable,” Piketty told AFP.

“They would do better to concentrate on reviving (economic) growth in France and Europe,” added Piketty, who was once close to the Socialist Party but has distanced himself from the policies of President Francois Hollande.

The link is here, via many people in my Twitter feed, including Justin Wolfers and Claudia Sahm.  There is a bit more here.

Why has Piketty’s *Capital* sold so many copies?

There is a symposium in The Guardian on that question, here is my short contribution:

Thomas Piketty’s Capital in the Twenty-First Century has been a hit for several reasons, most notably the quality of the work. But I’d like to focus on a neglected reason why the book has found so much support, namely it appears to strengthen the case for redistribution.

Most previous commentators focused on income inequality. Bill Gates or JK Rowling have earned more than CEOs or authors in the past, while incomes in the middle class or lower middle classes are often stagnating below what previous generations could expect. That’s a labor market issue – namely that some individuals are not very much demanded by employers.

The obvious questions are then a) how can we make low-earners more productive, and also b) how can we improve education?

Perhaps most importantly, as these issues get processed by the public there is a common attitude – whether justified or not – that many of the lower earners are partially or fully responsible for their own plight. The egalitarians don’t tend to win these policy debates.

In the simplest version of the Piketty model, wealth grows more quickly than does the economy as a whole and thus the picture changes. The relative losers are no longer low earners but rather anyone who is not a capitalist. Any disparity is due not to their shortcomings in labor markets but rather to their lack of a high initial endowment.

Furthermore redistribution will work like a charm, at least provided the redistribution is enough to give the poorer individuals some capital to invest.

If you are an activist who favors lots of redistribution, the Piketty story is a lot easier to tell yourself and to tell your audiences – and that is yet another reason for its popularity.

The other contributions are by Brad DeLong, Stephanie Kelton, and Emanuel Derman, who cannot bring himself to read the book.

Acemoglu and Robinson on Piketty

There is a new paper out by them:

Thomas Piketty’s recent book, Capital in the Twenty First Century, follows in the tradition of the great classical economists, Malthus, Ricardo and Marx, in formulating “general” laws to diagnose and predict the dynamics of inequality. We argue that all of these general laws are unhelpful as a guide to understand the past or predict the future, because they ignore the central role of political and economic institutions in shaping the evolution of technology and the distribution of resources in a society. Using the economic and political histories of South Africa and Sweden, we illustrate not only that the focus on the share of top incomes gives a misleading characterization of the key determinants of societal inequality, but also that inequality dynamics are closely linked to institutional factors and their endogenous evolution, much more than the forces emphasized in Piketty’s book, such as the gap between the interest rate and the growth rate.

For the pointer I thank Nathaniel Bechhofer.