Thursday, May 15, 2014

Piketty's Numbers Don't Add Up

My favorite Keynesian economist, Martin Feldstein, weighs in  at WSJ on the new Thomas Picketty book, Capital in the Twenty-First Century:
[Picketty's] conclusion about ever-increasing inequality could be correct if people lived forever. But they don't. Individuals save during their working years and spend most of their accumulated assets during retirement. They pass on some of their wealth to the next generation. But the cumulative effect of such bequests is diluted by the combination of existing estate taxes and the number of children and grandchildren who share the bequests.

The result is that total wealth grows over time roughly in proportion to total income. Since 1960, the Federal Reserve flow-of-funds data report that real total household wealth in the U.S. has grown at 3.2% a year while the real total personal income calculated by the Department of Commerce grew at 3.3%.

The second problem with Mr. Piketty's conclusions about increasing inequality is his use of income-tax returns without recognizing the importance of the changes that have occurred in tax rules. Internal Revenue Service data, he notes, show that the income reported on tax returns by the top 10% of taxpayers was relatively constant as a share of national income from the end of World War II to 1980, but the ratio has risen significantly since then. Yet the income reported on tax returns is not the same as individuals' real total income. The changes in tax rules since 1980 create a false impression of rising inequality...

Mr. Piketty's practice of comparing the incomes of top earners with total national income has another flaw. National income excludes the value of government transfer payments including Social Security, health benefits and food stamps that are a large and growing part of the personal incomes of low- and middle-income households. Comparing the incomes of the top 10% of the population with the total personal incomes of the rest of the population would show a much smaller rise in the relative size of incomes at the top.

Finally, Mr. Piketty's use of estate-tax data to explore what he sees as the increasing inequality of wealth is problematic. In part, this is because of changes in estate and gift-tax rules, but more fundamentally because bequeathable assets are only a small part of the wealth that most individuals have for their retirement years. That wealth includes the present actuarial value of Social Security and retiree health benefits, and the income that will flow from employer-provided pensions. If this wealth were taken into account, the measured concentration of wealth would be much less than Mr. Piketty's numbers imply.

The problem with the distribution of income in this country is not that some people earn high incomes because of skill, training or luck. The problem is the persistence of poverty. To reduce that persistent poverty we need stronger economic growth and a different approach to education and training, not the confiscatory taxes on income and wealth that Mr. Piketty recommends.


  1. I don't know the wealth derive through obfuscation and confiscation works well here:

    Internal Graph at CME Shows How the Futures Market is Rigged

    First Duffy testified that “Our market data is sent to everyone at once. While customers have several options in terms of how they can receive data from us, we do not restrict access. Having multiple connectivity options makes our markets accessible to a broader array of participants.”

    Then Duffy went on to explain co-location to the skeptical group of Senators, telling them:

    “Another service that CME Group provides to the marketplace is colocation. The criticism of colocation in some of the public coverage of this issue has failed to recognize that colocation actually equalizes access to the benefits of speed through proximity. It used to be that the benefit of speed from proximity was available only to traders who could buy real estate near an exchange, or where he or she thought the server would be…Everyone in our facility connects with the same length wire, so there are no unequal location advantages. This is one of the true benefits of our colocation services.”

    Duffy is one of the top executives at a critical futures marketplace which allows farmers and corporations as well as traders to hedge their risk in everything from farm crops like corn to interest rates, foreign currency, stock indexes, and oil. Its integrity is, quite seriously, a matter of national security. The CME Group owns the Chicago Mercantile Exchange (CME), the largest futures exchange in the world, as well as the Board of Trade of the City of Chicago (C-B-O-T), New York Mercantile Exchange (NYMEX), and Commodity Exchange (COMEX).

    The public is already well aware that some of the underlying products that trade on the exchanges of the CME Group are, or have been recently, rigged: like interest rates, and foreign currency exchange, and potentially metals and oil. But that’s not the exchanges’ fault – that’s a result of the serial collusion of too-big-to-jail global banks that both Congress and the U.S. Department of Justice have failed to tame.

    The question before Duffy on Tuesday by a Senate panel that should have had the good sense to put him under oath, given the wealth of material currently in the public domain attesting to the broad rigging of financial markets, was if his exchanges are rigged.
    When Duffy testified to the Committee that “Our market data is sent to everyone at once,” it was a beguiling deception.

  2. Statistics and liars.....liars and statistics....

    Mr. Piketty is a typical "World Dictator Pretend" psciopath who wants to use the coersion, threat & violence of the State to build a utopian society according to his mental image.......he is willing to resort to "any means necessary" to distort facts, stats & reason to do this......typical "end justifies the means" amorality of the Statist crowd!