We don’t quite know enough about wealth inequality to say much definitive about it now. But we do know a lot about income inequality. And that is definitely getting worse.
French economist Thomas Piketty and the FT’s Chris Giles, along other commentators, appear to have come to that broad consensus regarding the state of inequality in the West.
In an update to the appendix of his “Capital In The 21st Century” posted today, Piketty concedes Giles’ point that the data on wealth shares is inadequate to draw very many conclusions.
“Our ability to measure the most recent trends in wealth inequality is limited,” Piketty says, and continues, “There are many other important forces that could in principle drive wealth inequality in other directions.”
While his book covers much more ground than what’s gone on in the 21st century, his argument that inequality in one form or another is worsening right now is the most relevant part of the book. So this apparent concession about wealth is important.
But his more important retort is this: While available data sources on wealth may be limited, those that cover income inequality are not. And the trend there is much clearer.
Let’s talk about the difference between wealth and income. Most commentators who’ve been involved in this discussion define wealth as the rate of return on assets, while income comprises returns on labour in addition to capital.
In his review of “Capital” (published prior to Giles’ work), former Bank of England chief Mervyn King says Piketty failed to account for families who have pensions, own houses, or enjoy access to government-run programs, like a sovereign wealth fund, that provide broader access to wealth than what Piketty seems to imply.
But no one, he says, can dispute that the average returns on labour in certain professions have gone parabolic, though for reasons that remain quite diffuse. He gives a crystal clear example of what income inequality now looks like:
In a few weeks, Wimbledon will return to our television screens. The top tennis players in the world will compete for prize money that, boosted by broadcast income from more than 200 countries, will this year total £25 million.
Forty years ago, the total prize money was £91,000. Taking into account the rise in the cost of living, the players will receive 33 times as much this year compared with in 1974. Over the same period, average real hourly earnings in manufacturing have merely doubled.
“Is this growing inequality of income showing up in a correspondingly more unequal distribution of wealth?” he asks. “It is far too soon to tell.”
For Peter Lindert, the emeritus economist at UC Davis whose data was cited by both Piketty and Giles, too much emphasis has been placed on the state of wealth holdings at the expense clearly rising income inequality.
“The FT’s flap over the wealth data is a mere side-show,” Lindert said. “Much more important than the details of the wealth data are the striking movements in the inequality of overall income, much of which were movements within labour incomes and the non-elite, not closely related to wealth inequality.”
That was also more or less the conclusion Larry Summers came to in his review of Piketty: the data on wealth are inadequate to draw very many sweeping conclusions.
“Piketty, being a meticulous scholar, recognises that … the gains in income of the top 1% substantially represent labour rather than capital income, so they are really a separate issue from processes of wealth accumulation.”
Giles never really disputes that income inequality is getting worse, and in a rebuttal published Wednesday to the econ-blogosphere’s initial set of rebuttals to his original post directs readers to study what folks like Summers and King have said about income inequality.
“There is no doubt that the data the FT has questioned relate to just six charts in Prof Piketty’s book, not his theory, nor his numbers on income distribution,” he wrote. “Many others have commented on those.
Piketty’s concessions about the unreliability of wealth data extend to one of the more contentious apparently glaring shortfalls Giles highlighted: whether British wealth inequality is getting worse. While Piketty argued it was, Giles went back and found such a conclusion was not supported by the data available. Here was the chart:
To this, Piketty now responds, “although I think my estimate is more reliable and rests on better methodological choices, I also believe that this large gap reflects major uncertainties and limitations in our collective ability to measure recent evolution of wealth inequality in developed countries, particularly in Britain. … I believe this is a major challenge for our statistical and democratic institutions.”
For Summers, it’s not clear why income inequality is clearly rising without an obvious increase in wealth inequality, though technology’s role in eliminating forms of wage labour has likely played an outsized role.
King more or less agrees, writing, “Technological change and global competition have raised the demand for special talent and lowered it for unskilled labour. The rewards for success have risen and wages towards the bottom of the income distribution have been squeezed.”
There are two bottom lines in all this. The first is that you’ll have to really commit to vanishing into the weeds of the available datasets if you want to even begin discussing what’s going on with wealth.
But the main thing we’ve learned from “Piketty-gate” is that everyone actually agrees that there is income inequality. As This should give everyone pause.