(Thomas Reis)

From the May 19, 2014, issue of NR

Thomas Piketty topped the Amazon.com charts in America just shy of 150 years from the publication of volume 1 of Das Kapital.

Karl Marx would have scoffed at the possibility that by the turn of the 21st-century capitalism would produce a society in which books and products of every variety would be available to people of any income almost instantaneously. He predicted that wealth would accumulate and accrue to a shrinking number of people over time, to the point where inequality would destroy capitalism. Now comes Piketty, in a weighty tome titled to evoke Kapital, to warn that the “Marxist principle of infinite accumulation” may not have been completely wrong after all. Levels of wealth concentration today and in the future will not lead to socialism. But they could nevertheless become “socially destabilizing,” he argues, as capitalism in the context of slow growth could lead the wealthy to “ultimately devour all of national income.”


The reception that Piketty’s book, Capital in the Twenty-First Century, has received in the U.S. speaks to the irrational obsession with inequality that has gripped the American Left. A recent New York Times analysis showed that the buzz around the book has come mostly from rich liberal states along the Boston-to-Washington corridor. By contrast, Americans as a whole, in recent polling by the Pew Research Center, ranked inequality third in importance out of four fundamental economic issues, way behind unemployment but also significantly behind the national debt (and ahead only of inflation, which has been at fairly typical levels).

To read the fawning reviews by liberal researchers and journalists, one could be forgiven for thinking Piketty had written a book irrefutably demonstrating that inequality really is, in President Obama’s words, “the defining challenge of our time.” But he has done no such thing.


Capital in the Twenty-First Century describes a past and present that concern the Left, and sketches out a beyond-iffy worst-case scenario for the future that makes progressives tremble with some combination of fear and thrill. It is an important book, but missing from its 700 pages is a serious argument about when and why inequality should be worrisome. Piketty’s wealth- and income-concentration trends are problematic as indicators of rising inequality. And the apocalyptic future Piketty paints as “possible” is an almost laughably rough guess that is the social-science equivalent of the direst scenarios envisioned by climate-change doomsayers.


The bulk of Capital in the Twenty-First Century is devoted to describing and explaining very long-run trends in wealth and income. These estimates were mostly developed by Piketty and his colleagues during the past 15 years and represent an invaluable contribution to the economics profession. Piketty’s discussion of these trends is invariably informative and thought-provoking, even if he often worries about them without much in the way of justification. Scattered throughout are wonky-but-accessible diversions into measurement issues and economic controversies related to labor, taxation, and inequality. You will learn a lot from this book.

But you will also be prodded to believe that capitalism may very well be doomed unless we rein in inequality. This is the thesis in service of which Piketty marshals his impressive data. And, of course, it is why the book has been so heartily embraced by the Left.

Before getting to the details of Capital’s argument, let’s address the Marxism issue. Is Piketty some flavor of Marxist? Paul Krugman and others have mocked conservatives for suggesting it. Piketty is pretty far to the left by American standards: In the book, he advocates a tax rate of 80 percent for income above $500,000. He also advised French presidential candidate Ségolène Royale in 2007, when Royale was the nominee of the French Socialist party. One cannot help but sense some nostalgia in his writing for the severe interventions in the economy, including the nationalization of assets, undertaken by a number of countries during and after World War II. In one passage he describes a debate between socialist and “bourgeois” economists. And Piketty really does believe that Marx may prove prescient in predicting that, unchecked, wealth accumulation will be radically disruptive to capitalism. “Where there is no structural growth,” he writes, and “productivity and population growth . . . is zero,”

capitalists do indeed dig their own grave: either they tear each other apart in a desperate attempt to combat the falling rate of profit . . . or they force labor to accept a smaller and smaller share of national income, which ultimately leads to a proletarian revolution and general expropriation. In any event, capital is undermined by its internal contradictions.



Piketty does not share Marxists’ desire to heighten the contradictions of capitalism so that we can arrive at socialism, but he shares Marx’s hubristic suspicion that capitalism is a threat to itself rather than an engine for broadly shared prosperity through mutual exchange. In this, he is firmly of a piece with the American Left.

So, are they right? Piketty argues that in capitalist countries, the return to wealth (r­) tends to exceed the rate of growth (g­) of the economy. In the most basic sense, this improbably famous “r > g” tendency means that the share of national income workers receive as compensation (“labor income”) falls and the share of income going to owners of wealth (“capital income”) rises. Because capital income is less equally distributed than labor income, these dynamics will increase the share of income received by the top 1 percent. Finally, if the wealthy reinvest most of their returns, wealth inequality will also rise. It’s a triple-whammy.

How does Piketty reach these conclusions? He has a simplified model of how the economy works that, if we accept all of the assumptions entailed in it, produces the result mathematically. If the economic growth rate g falls relative to the savings rate, then wealth will become a bigger multiple of national income (savings rates are assumed not to adjust as people accumulate more and more wealth). Unless the return to wealth r falls more than the wealth-to-income ratio rises, then by definition the share of national income going to asset holders rather than workers will rise. And unless inequality in capital income falls enough, income concentration will increase. Lastly, if consumption using the additional income produced by wealth is sufficiently low, then asset holders will reinvest enough of their returns to increase wealth concentration further.


The basic problem in Piketty’s argument lies in those ifs and unlesses and in the infirmity of his assumptions. Piketty thinks economic-growth rates will be low because population growth has declined and because productivity growth will remain sluggish. Of course, others, such as Erik Brynjolfsson and Andrew McAfee, believe we are on the cusp of a productivity breakthrough, which would push the economic-growth rate up and reduce wealth as a multiple of national income (barring a corresponding increase in savings).

Piketty believes that if the wealth-to-income ratio rises, as he suspects it will, then the return to wealth, r, won’t fall enough to offset it, leaving capital’s share of income to grow with wealth. But he thinks this only because trends in the capital share of income in France and the U.K. have historically moved in the same direction as the wealth-to-income trends (albeit not as dramatically). He presents no evidence on returns to wealth in the U.S., and while he nods toward the possibility that r can be affected by political and institutional factors, he seems not to think that they will be enough to lower the return to wealth in the future (unless we heed his policy prescriptions, which involve a global wealth tax).

At the same time as he minimizes growth in g, he seems confident that r will rise. Piketty concedes that the return to wealth may have declined slightly over the long run — and by more after taxes are taken into account. But he nevertheless says we “cannot rule out the possibility” that it will rise.

Agnosticism about an increase in the return to wealth is one thing; slipping such a rise into one’s projections is another. One of Piketty’s charts projects that after capital taxation, r will rise and exceed g, as it has for most of modern history, inspiring Piketty’s fear of exploding wealth concentration. However, a less-celebrated figure projects that the pre-tax r will be lower in the future than today. Piketty’s post-tax projection leads to exploding wealth concentration only because he has assumed that taxes on capital will disappear in the 21st century. Take away that assumption, and economic growth rates will still exceed the after-tax return to wealth through mid-century. (And that does not even take into account the fact, left unmentioned by Piketty in his discussion of these charts, that taxes and transfers will also work to make the disposable incomes of the middle class and poor grow faster than labor income alone. Inequality looks worse when you fail to take into account the ways in which democratic capitalism ameliorates it.)


What about the assumption that inequality of capital income will grow? We lack very good data on trends in capital-income inequality, partly because of difficulties measuring capital gains (the appreciation in the value of tradable assets) and losses. The tax-return data used by Piketty for the ubiquitously cited income-inequality estimates he has developed with Emmanuel Saez count capital gains only if they are reported on tax returns, which generally means only when they are taxable and realized. Excluding non-taxable capital gains means that most wealth accruing to the middle and working class, which comes in the form of home sales or 401(k) and IRA investments, is invisible in Piketty’s data. Moreover, because tax returns count all gains when they are realized and members of the top 1 percent strategically time the sale of their assets after holding them for years, all of the gains accruing over time are counted on a single tax return in years close to asset-market peaks. This increases the share of capital income accrued by the top of the income strata, since it’s concentrated in one year.


The issue of measuring capital gains affects the broader income-concentration estimates used by Piketty. There are other problems with his measurements: Tax filing by dependents with after-school, summer, or college jobs makes the bottom ranks of the income ladder look much poorer than they are. Employer-provided health insurance — a rapidly rising share of worker compensation — is missing from the data. And as with the capital-share-of-income estimates, Piketty’s income-inequality figures do not account for the primary ways in which we address income inequality: through progressive taxation and transfers. Research by Richard Burkhauser and his colleagues suggests that once we account for many of these issues, income concentration may have actually fallen somewhat between the business peaks of 1989 and 2007. To be sure, this result stands in contrast to most research on income concentration, but it is one of only a few papers to grapple seriously with capital gains.

Piketty also presents evidence on wealth-inequality trends. In the U.S., according to estimates from Saez, wealth concentration peaked in 1930 and fell up through the early 1980s. From about 1980 onward, new estimates from a “preliminary” PowerPoint by Saez and Gabriel Zucman, another Piketty colleague, contradict the trend shown by Piketty, with Piketty’s estimates suggesting little change but Zucman and Saez showing a steady rise in wealth inequality. At this point, in other words, we don’t really know whether wealth concentration has grown in the U.S. or not.

Piketty’s fans have ignored criticisms of his data and mocked critiques of his model by saying that in fact the model predictions align with what countries have experienced, so the model has proven its worth. But the model is consistent with the facts only in a very broad sense. Wealth has risen as a multiple of income in some places and times (but it was pretty flat in the U.S. over the 20th century). Capital’s share of income has increased since the 1960s, and capital-income concentration and income concentration generally have probably grown since the 1970s (though by less than Piketty believes).

These quantities often follow each other in the ways predicted by Piketty’s model, but not always, and there are other explanations for the rise in these inequalities. In his research with Zucman, Piketty finds that asset prices have increased faster than consumer prices (a possibility ruled out by his model), and that can account for anywhere from none of the rise in wealth relative to income between 1970 and 2010 to 58 percent of it, depending on the country. My favorite alternative puts cultural factors front and center. The ubiquity of the male-breadwinner ideal in developed nations in the 20th century may have directed overpayments to male workers and away from top earners and capital. As married women began working more after World War II, the rationale for these “economic rents” disappeared, and through a societal recalibration, income may have been redirected upward to the top (as well as sideways to women).

Why should we care about the inequalities Piketty highlights? It is a question that to a remarkable extent goes unanswered by Piketty and by the American Left. Piketty ultimately falls back on folk theories of how economic inequality affects democracy, which are not spelled out with the rigor that characterizes his economic research. Wealth inequality, he fears, will “radically undermine the meritocratic values on which democratic societies are based.” He goes so far as to evoke Haymarket Square and wonders: Will “this kind of violent clash between labor and capital belong to the past, or will it be an integral part of twenty-first-century history?” Piketty even worries about increasing total wealth in a world with stable wealth inequality, because then “the owners of capital . . . potentially control a larger share of total economic resources.” “In any event,” he says of higher wealth levels per se, “the economic, social, and political repercussions of such a change are considerable.”

Inequality mongers are so hung up on income and wealth gaps that they lose sight of how much better off the middle class — and even the poor — are today than in 19th-century Chicago. Piketty describes the dramatic long-term improvement in living standards experienced around the developed world in Chapter Two of Capital, but by Chapter Six’s discussion of the capital–labor split, it has long been forgotten.


Perhaps because Americans live in a world where deprivation is rare by historical standards, research on policy preferences across income groups tends to find similar positions and priorities among rich, middle class, and poor. Workers are not so desperate that they will take bullets to advance their class interests — which increasingly resemble the interests of those at the top.

Inequality also doesn’t appear to have hurt the incomes of the poor or middle class in the way Piketty claims. Income growth in the U.S. began to slow in the 1970s, even for the richest taxpayers, years before the top 1 percent’s share started rising. Piketty’s tax-return data may in fact have misled him into thinking that incomes have actually been in decline over the long run — they indicate a drop of $3,500 for the bottom 90 percent of taxpayers in the U.S. between 1979 and 2012.

That drop stems from the inclusion of retirees in the tax data but the exclusion of their Social Security benefits, from the omission of other government transfers and the failure of the data to account for falling taxes, from the conflation of tax returns with households, from overstatement of inflation, and from a neglect of declining household size. My own estimates from household-survey data indicate that middle-class incomes for a family of four rose by more than $10,000 after taxes and transfers (without even considering the value of health insurance). Among families with a non-elderly head, middle-class incomes rose by nearly $10,000 before taking into account taxes or transfers.

Research is split as to whether rising inequality corresponds to slower economic growth. The only study of which I am aware that looks at whether increases in income concentration hurt middle-class incomes, by sociologist Lane Kenworthy, finds that there is no apparent relationship. Inequality can promote middle-class income growth by enlarging the size of the economy.

As noted by several economists commenting on Capital, because the returns to wealth will remain robust only if productivity growth does, Piketty’s own model suggests that rising inequality will be accompanied by improved living standards for workers. It follows that his proposals to mitigate the increase in inequality would narrow economic gaps but leave real worker compensation lower than it would have become otherwise. This is a tradeoff Piketty and the Left do not recognize, do not acknowledge, or somehow prefer.

What is striking about the preeminence that the American Left and Piketty have given economic inequality is not that they must necessarily be wrong about its social and economic costs. Rather, it is that they are so adamant that they are right despite the absence of strong evidence. There is a parallel here with the climate-change debate, another liberal obsession. As Jim Manzi has written in these pages, it is a fairly well-established fact that human activity is causing global temperatures to rise. But there is little reason to believe that the consequences of global warming will be as dire as Al Gore wants you to think, and using the worst-case scenario as a guide to policy will have great, potentially unnecessary, costs. Buying into the doomsday scenario about inequality presents similar risks.

Thomas Piketty knows that big thinkers before him — Marx, but also Thomas Malthus and David Ricardo — have been proved badly wrong by their predictions of capitalism’s ultimate demise. “In retrospect,” he writes, “it is always easy to make fun of these prophecies of doom.” Piketty has written a landmark work describing the past, but in proving unable to resist predictions about the future, he has exposed himself and his new friends on the American left to just that sort of future ridicule.

– Scott Winship is the Walter B. Wriston Fellow at the Manhattan Institute. This article originally appeared in the May 19, 2014 issue of National Review.