Original URL: https://www.theregister.com/2014/06/04/your_guide_to_the_great_piketty_debate/
Piketty thinks the 1% should cough up 80%. Discuss
Your guide to the Great Piketty Debate. Hint: 'Wealth' is relative
Posted in On-Prem, 4th June 2014 09:06 GMT
Worstall on Wednesday Piketty's Capital in the 21st Century has the economics world agog: be the first among your friends to really understand it.
Thomas Piketty's book, Capital in the 21st Century, has managed to top the Amazon bestseller lists as well as getting economists snarling at each other. It's the combination of these feats that is so surprising: economists don't snarl at each other over popular books like the new Jack Reacher... And, as a rule, the things that get economists excited aren't necessarily appreciated by the rest of us.
The essential message of the book is that capitalism is doomed (doomed I tell 'ee), unless we immediately have an 80 per cent top rate income tax and also a global wealth tax.
This does, of course, excite those who dream of soaking the rich. It also appals the running dog lackeys for the wealthy such as myself. As a result, there are claims and counterclaims about what he's got wrong and or right in his research. So far we've seen everything from the idea that his basic theory is wrong all the way through simple numerical errors (see the FT article here and Piketty's response here) to a claim that he's ignored the lifetime savings hypothesis. All of which would no doubt be very boring indeed for you guys to have me wade through.
So instead let me ask and then answer a technical question about whether this actually matters. The TL:DR answer is no, it doesn't, not to the degree that people seem to think it does. You will then be one up on the entire discussion going on: for no one is as yet making this point.
Tonight we're going party like it's 1849
The basic idea is that if returns to capital grow faster than the economy as a whole, then the rich will get ever richer. Thus we will return to the sorts of levels of wealth inequality that we saw in the 19th century. This would be bad so we must stop it happening.
Leave aside all of the rest and just let us proceed from that point. We'll not worry whether his mechanisms add up or not. We'll not even worry about whether increased wealth inequality would be bad. We'll concentrate only on the idea that we'll get back to 19th century levels. And the truth is, when we think about it properly, is that there's not a hope in hell of this happening.
Why? We have a welfare state, whose aim and purpose is to make us all richer. And, despite the sort of calumnies that people like me occasionally heap upon it, it does just this.
The crucial point here is that we must distinguish between two different sorts of inequality – twice over, in fact. The first is between income and wealth and the other between market outcomes and consumption outcomes. Income inequality is rising, oh yes it is, and while the figures for wealth inequality are more confusing let's just assume that, given the way that we measure it, it is rising.
Have a look at this Swedish model
And now let's just add one jarring little fact: wealth inequality in Sweden is markedly higher than in the UK or US, but income inequality there is markedly lower. Consumption inequality is lower again. So there's clearly something going on that makes wealth inequality not all that important to how lives are actually lived. And if there's not much influence on the way that lives are lived then perhaps it's not all that important: and it's the existence of the welfare state that makes it so.
In grubby detail, the wealth that is unequally distributed is financial assets (shares and bonds), private pensions savings, private housing equity and then personal stuff (art, furniture, all that gubbins). And if we were looking at wealth inequality in the 19th century that's all there would be.
The NHS is there to provide services that would cost untold amounts elsewhere
But now look at the early 21st century. We have free at the point-of-use healthcare paid for through a progressive taxation system. UK residents are safe in the knowledge that we'll get scraped up off the road after a car smash, or get treatment for some horrible cancer. OK, maybe not the best treatment in the world, but a more or less equitable treatment as compared with our neighbour, whatever our financial situation as to wealth or income.
Does that make us richer? If we have children, we do not need to save to educate them, the State provides free at the point-of-use lessons for all. That's a source of wealth, isn't it? Given the costs of private schools (say, 10k for a day school) that's actually £130,000 in wealth over the five to 18 years for each child.
We'd all agree that if you've £100k in equity in your two-bedder somewhere then you've £100k of wealth. But what if you've an inheritable tenancy at £5k a year below the market rent in social housing? You might have another 30 years to live in that place: is that £150k in "wealth" or not?
There's gold in that pension pot
Never mind your investments, your pension is worth a lot
The problem becomes even more stark with pensions provision. These wealth figures deliberately exclude the value of the state pension from any calculation of wealth. But it's an inflation-protected annuity worth (as the pensions guarantee rather than the pension itself) some £130 a week for life. At age 65, it would cost you around £150k to buy one of those. So, everyone gets, through that welfare state and state pensions system, £150k of wealth, surely?
I have actually gone through this with the professorial types who estimate wealth inequality and they've all nodded their heads and agreed that this wealth just isn't included in any of the calculations.
We do make these adjustments when we look at income inequality though. We can and do calculate both inequality and poverty by looking only at market incomes. Then we calculate them again by looking at after tax and after benefits incomes. Sweden and the UK are broadly similar by those market measures: Sweden is very much more equal, has less poverty, after we look at tax and benefits – because they tax more and have higher benefits. The poverty rates that get reported are always added up after all of the things we do to change the original distributions (except for the US for odd historical reasons). We do not make any of these adjustments when we look at wealth inequality.
Which brings us to Worstall's Fallacy: the idea that we cannot decide we must do more to solve a problem without looking at the effects of what we are already doing to solve said problem.
We cannot insist that taxes and benefits must be higher by looking solely at market incomes. We need to go look at what everyone has after tax, after child credit, working tax credit, unemployment pay, pensions and so on – only then can we decide whether we should be doing more (or less). This is something we normally do do with incomes and is something we're not doing with these wealth calculations.
To give an example of how far inequality declines when we really include everything – such as NHS, education and other government-provided services – the TUC estimated that market incomes have a ratio of some 30:1. That's the 90/10 ratio, between those just on the cusp of being in the top 10 per cent and those on the limit of the bottom 10 per cent of market incomes. When we add in everything that we do to reduce that, we get a consumption difference of some 6:1. Maybe that's equal enough, maybe that's still a shocking level of inequality. But it's certainly a very different level of it, isn't it?
And so it is with the measures of wealth inequality that absolutely everyone is arguing over. The only things that are being considered are marketable wealth, housing, private pensions (not really marketable but still) stuff and financial assets. What's not being included, not at all, is all of the things that we do to equalise that wealth. We're committing Worstall's Fallacy by simply not including any of the influences or outcomes of the welfare state.
And this is the real problem with Piketty's book. It's nothing to do with whether he's coded errors into his spreadsheet, and nowt to do with whether market wealth inequality is rising or not. The problem is that market wealth inequality simply isn't as important as it once was. Even if it did rise to 19th century levels, it still wouldn't be all that important. For we already equalise wealth, income and consumption opportunities through the welfare state.
Given that the point of the welfare state is to do that equalising, it seems a very odd thing for everyone to be forgetting about it when we discuss this subject. He may or may not be wrong about what is happening, but he's definitely wrong over how important it is. ®