Piketty's Dodge on Inequality
New York Times economics columnist Eduardo Porter recently interviewed economist Thomas Piketty on his work on income and wealth inequality. Piketty, in case you haven’t followed, has been documenting the increase in income and wealth inequality in the richer countries, including the United States.
Porter doesn’t ask any questions about world inequality. My impression is that it has decreased as large countries like China and India have gotten wealthier. But, of course, their real incomes could be growing faster than Americans’ real incomes and income inequality could still be increasing. Start with a per capita income of $2,000 that is growing at 8% per year in poorer countries and a per capita income of $30,000 that is growing at 1% per year in richer countries. One year hence, per capita income in the poor countries will be 8% higher, which is $160 more. One year hence, per capita income in the poorer countries will be $300 more, which is, obviously $140 more than $160. So the gap will have grown. It will take a number of years before the absolute gap falls.
By the way, there is one quick way to make sure that global inequality of income falls dramatically: for the richer countries to allow in an additional 50 to 100 million immigrants a year.
I would be interested in Piketty’s take on both of the above. Apparently, Porter is not.
But I want to focus on the area on which Porter focuses: increasing inequality within a country, specifically the United States.
Porter asks a good question:
Might inequality in the United States be less damaging than it is in Europe because the very rich were not born into wealth, but earned their money by creating new products, services and technologies?
Porter was implicitly, I think, getting at an obvious point: that large rewards for innovation give incentives for innovation. The innovation will help hundreds of millions of people who will never be really wealthy: think of how you gain from a computer and a cell phone.
Here’s how Piketty answers:
This is what the winners of the game like to claim. But for the losers this can be the worst of all worlds: They have a diminishing share of income and wealth, and at the same time they are depicted as undeserving.
Do you see what Piketty did? He didn’t answer. Not only did he not answer what I think was Porter’s implicit point–the large social value of the incentive to innovate–but also Piketty didn’t even answer the narrow question asked: is inequality less damaging because many very rich people earned their money by innovating?
What did Piketty do? He made it about what the “winners” “like” to claim, not about whether the claim is true. Had I been Porter, I would have followed with something like the following:
Regardless of what they would “like” to claim, is it true?
Piketty also conflates increasing inequality with “losing.” Notice that he calls those with a diminishing share of income and wealth “losers” even though they may well be winners, but not as big winners as those with an increasing share of income and wealth.