Thomas Piketty: Pinko or Prophet?

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from ThinkAdvisor,

The obscure French economist’s call for large-scale wealth redistribution, and challenges to his data, have not stopped his book from topping the bestseller charts.

Time was when wealth redistributionists were derided as “commie pinkos” or Marxist sympathizers if they stepped out of their bohemian enclaves in Berkeley or Madison.

But times have changed, and some of the central themes of Karl Marx’s Das Kapital, which sought to expose the contradictions of capitalism, have been updated in Capital in the Twenty-First Century, a 700-page tome that has risen to No. 1 on numerous bestseller lists (e.g., Amazon, The New York Times).

Indeed the book’s author, French economist Thomas Piketty, has been honored in the White House and been praised by left-leaning Nobel Prize-winning economists such as Paul Krugman and Joseph Stiglitz.

In his book, Piketty claims to have identified the central contradiction of capitalism, which he expresses formulaicly as stemming from a rate of return on capital that exceeds the economy’s growth rate.

In Picketty’s thinking, this tendency leads to a condition in which entrepreneurs become a rentier class that dominates those who own only their own labor. This system perpetuates itself, leading to a growing gap between rich and poor, which undermines society’s democratic order unless it is corrected through redistributive taxation.

Much of the controversy that has greeted his work in the United States — particularly in conservative economic circles — concerns this taxation issue, since Piketty does not propose incremental tax rate increases, but rather boldly calls for high tax rates on the wealthy and annual wealth taxes.

The author suggests an 80% tax rate on incomes of “$500,000 or $1 million,” according to a review of his work in the Wall Street Journal, and 50% to 60% tax rates on incomes of $200,000. He wants a 10% annual wealth tax on the highest incomes and a one-time 20% tax on lower levels of wealth. Piketty’s purpose in advocating high tax rates is “to put an end to such incomes,” and to develop what he calls “the meager U.S. social state,” the Journal reports.

Critical reviews have hardly arrested the book’s momentum on the bestseller charts — the English transation of Picketty’s French-language work having only been released in March — but it remains to be seen whether a new controversy over the validity of Picketty’s data will.

On Friday the Financial Times stirred a torrent of new criticism with an article claiming that its own investigation of Piketty’s data had uncovered “mistakes and unexplained entries in his spreadsheets, similar to those that last year undermined the work on public debt and growth of Carmen Reinhart and Kenneth Rogoff.” Ironically, Reinhart and Rogoff’s spreadsheet error challenged a claim embraced by conservative economists that excessive debt enjoyed slower economic growth.

But the Financial Times’ investigation challenged liberal economists’ view that an increasing share of total wealth is concentrating among society’s wealthiest few.

Chris Giles, the author of the report, says his paper and an independent expert found that Piketty’s own data show no such tendency and claims “there are transcription errors from the original sources and incorrect formulas. It also appears that some of the data are cherry-picked or constructed without an original source.”

In a response to the Times, Piketty starts out by noting that it was he himself who made his data available to the public online in a bid for transparency.

He also notes the heterogeneous nature of his sources necessitated “a number of adjustments to the raw data sources so as to make them more homogenous over time and across countries.”

But the author stands by his conclusions, writing that “I would be very surprised if any of the substantive conclusion[s] about the long run evolution of wealth distributions was much affected by these improvements.”

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