An Economist Has Put Together The Best Explainer Of Inequality And Piketty That We Have Ever Seen

Everyone’s been talking about rising inequality in the U.S., spurred on by the massive popularity of French economist Thomas Piketty’s book “Capital in the 21st Century.”

As much attention as it’s received, it’s also come in for some criticism.

The core fact of income inequality doesn’t seem to be in doubt. Indeed, the FT, which found flaws in Piketty’s use of some data, never questioned this element specifically.

But Piketty’s assertions on wealth, and his conclusions about the nature of capitalism, continue to be called into question.

Now, Michigan professor and New York Times contributor Justin Wolfers has laid out the state of the rest of the Piketty debate in a wonderful presentation posted to the NBER.

With his permission, we republish it here.

This all-time great cover from BusinessWeek captures the obsession with Piketty and his work.

As previously mentioned, no one doubts income inequality is worsening.

It's grown especially nasty in Anglophone countries.

But it's less clear whether wealth inequality is accelerating.

Here's Wolfers' table of contents.

Piketty argues the ratio of wealth to income is determined by the savings rate divided by the growth rate.

As Larry Summers explained in his review, Piketty says this will lead to ever-increasing wealth-to-income ratios, as returns on savings (or capital investment) outpace returns from growth alone.

Here are the exact steps Piketty says gets us there. First, wealth growth outpaces growth in income...

But this only works if you assume that all capital income is reinvested, and no labour income is. Wolfers finds this implausible.

Next, Piketty asserts, the wealth-to-income ratio begins to climb...

In fact, Wolfers says, the wealth-to-income ratio has been driven entirely by gains in home prices, not rents. Piketty does not discuss this, which makes this particular argument somewhat specious.

Next Piketty step: capital's share of national income rises...

But just because you're accumulating more capital doesn't mean its output is increasing. In fact the opposite may be true.

So, is income being ever more concentrated in the hands of a select few?

Yes, but not for the reasons Piketty mentions. It comes down to a question of net savings, not gross savings...

Which, as Wolfers' explains contra Piketty's prediction...

Doesn't work, because, even though gross savings may be increasing, net savings do not.

This is a more realistic state of affairs.

So what do you need to know?

Wolfers dismisses most of the FT's critiques...

Which he said contained flaws themselves.

The one thing you need to know: labour income inequality has exploded, especially in the U.S. This is undeniable.

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