What Piketty Misses
Thomas Piketty’s book Capital in the Twenty-First Century is a global
best seller that has attracted more reviews from academics and public intellectuals
than any other economics book in recent memory. In the middle of May, Google
showed an astounding 12.5 million entries about him and his work.
None
of these many reviews have made the point that the voluminous statistics used
by Piketty are of limited relevance for reaching his neo-Marxian conclusion about
the inevitability of rising inequality, social unrest and the collapse of
existing market economies. The statistics he uses are snapshots of the
distribution of income and wealth taken of a population whose composition
changes with every picture taken.
What
is more relevant to the assessment of the problems he foresees is information
that traces the incomes of the same individuals through time. Only in recent
years have governments begun to publish some of this information. In the United
States one set of data has been authored by the Treasury. In Canada, Statistics Canada
has published some data, which have received virtually no media attention. The
Fraser Institute has recently published a study using data specifically
compiled by the agency at considerable cost.
These
Canadian data provide information that surprises many: Out of 100 workers who
were in the lowest income quintile in 1990, 87 had moved to higher income
quintiles 19 years later, with 21 of them having reached the very top quintile.
Income mobility also results in downward movements. Of 100 Canadians in the
highest income quintile in 1990, 36 were in lower quintiles 19 years later.
Another
important information provided by the Fraser Institute data puts a lie to the
many reports about the demise of the middle class. The same Canadian families who
had inflation-adjusted average incomes in the lowest quintile in 1990, by 2009 had
incomes 280 percent higher. During the same period families in the top quintile
in 1990s experienced an increase of only 112 percent. The average incomes of
the middle three quintiles rose by 153 percent. These data show that all
Canadians have become richer, the poor more so than the rich and the middle
class has more than kept pace with the rich.
The
income distribution dynamics revealed by these statistics is the result
primarily of the life-time pattern of income: Pay and productivity are low when
workers enter the labor force, rise with age and work experience and later decrease
with the onset of age-related disabilities and retirement.
The
time pattern of incomes of individuals is also caused by short-lived influences
on the ability to work such as illnesses and personal decisions about raising
children, further education and changes in life style. In Western market
economies the impact of these events on income is limited through access to
social security benefits and private insurance.
High incomes also tend
to be earned only for limited periods of time as a result of one-off events
like the realization of capital gains, earning performance bonuses and even
lottery winnings. Professional athletes, performers in successful movies,
authors of best-sellers and even managers typically have high incomes for short
periods. Statistics Canada data show that in recent years, earners in the top
1% did not have incomes at that level five years earlier. The Forbes data on
billionaires shows that only 10 percent of those on the 1982 list were still on
the list in 2012, even after adjustment for inflation over the 30 years.
Most
of the extra-ordinary recent growth in the income of top earners, the infamous
1%, is due to the growth in the market for their services, which has been
driven by the introduction of new electronic media, globalization and the
growth in incomes of audiences: Professional athletes, creative artists and
entertainers now reach millions rather than the hundreds who used to fit into
arenas or thousand in movie theaters.
The
globalization of commerce has increased the size of firms and raised the dollar
value of the contributions managers can make to their bottom line. A firm with
domestic sales of $100 million can offer a top manager expected to raise sales
by one percent less than it can pay after globalization raised this same firm’s
sales to $10 billion. The earnings of Bill Gates and Steve Jobs and their top
managers would have been much smaller if their innovations had been sold only
in the United States rather than in the entire world.
Piketty
used the wrong data to conclude that the rich are getting richer and the poor
are getting poorer. Dynamic income statistics show that all are getting richer,
the poor more than the rich. He also wrongly attributes most of the growth in
inequality of wealth to excessive savings accruing to the rich when in fact it
is due to recent technological revolutions and the globalization of business
that benefited super-managers and innovators-entrepreneurs like Gates and Jobs.
The
case Piketty makes for confiscatory income taxes and imposts on wealth to
prevent “potentially terrifying” events is very weak for Western nations where
most people rightfully expect growing incomes and wealth during their lives and
where social insurance transfers protect the incomes of the temporarily and
permanently needy.
Herbert
Grubel
Professor
of Economic (Emeritus), Simon Fraser University
Senior
Fellow, The Fraser Institute, Vancouver, Canada
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