Piketty’s inequality argument in six charts

Thomas Piketty’s book, Capital in the Twenty-First Century, has stirred up a lot of controversy.  As well it should.  If he is right, there is nothing to stop a tiny elite from growing richer and richer at the expense of the rest of us.

The important thing to remember of Piketty’s argument is that it is not based on economic theory.   It is based on years of research on sources of wealth and income through history in different countries.   And, as quantitative information, it lends itself to charts.

I think Piketty’s research is important to understand for the future of our country and the world.   I’m reproducing six charts based on Piketty’s data from an article by John Cassidy in The New Yorker, which sum up Piketty’s findings well.

The first chart shows the share of American income taken by the best-paid 10 percent.

chart-01The chart shows that half of the income earned by all Americans went to the top 10 percent just prior to the stock market crash of 1929, that their income share fell to between 30 and 35 percent between 1945 and 1975 and now it is going back up again to 1920s levels.

Piketty explained this with his equation, r > g.   When the rate of return on investment is a higher percentage than the rate of economic growth, the holders of capital will get an ever-increasing share of income.   For the purposes of his book, Piketty has a special definition of capital, which is different from economists’ standard definition.  He defines capital as anything you can own that will give you an income, including agricultural land, government bonds, houses (which you can rent), common stocks or anything else.   In the Old South, prior to the Civil War, slaves were a form of capital.

Income distribution in the 20th century USA became more equal for a time partly because the Great Depression destroyed the value of so many financial assets, but mostly because of the high rate of economic growth following the Second World War.

Of late the pay of financiers and corporate executives has gone up much faster than the pay of middle-class and poor people, but, as the following chart shows, inequality in ownership of financial assets is a bigger factor in the income share of the top 1 percent than inequality in wages and salaries.

top1%sharechart-02

The next chart shows that same trend exists among the top 1 percent in all the major English-speaking countries.

chart-03

The next Cassidy chart shows the income shares of the top 1 percent in some of the developing countries.

chart-04And the next chart compares inequality in wealth (not income) of the top 10 percent and top 1 percent in the United States and Europe.   Inequality in wealth is much greater than inequality in income.

chart-05

The chart above shows that, historically, Europe’s distribution of wealth has been much more unequal than the U.S. distribution, but this has changed since 1970.

The final chart illustrates Piketty’s theory of what is happening.   It shows his estimate of the rate of return on capital versus the rate of growth from the distant past down to the present.

chart-06

Thomas Piketty is deservedly praised for his thorough research.  Most of the commentary about income inequality during the past 10 or so years is based on his research or research by his collaborators.

But data is gathered in different countries in different ways, so many of his comparisons are apples-to-oranges.  And where conclusive data is lacking, he makes informed guesses.  Really, how could anybody know what the annual rate of growth, let alone the annual rate of return on capital, during the first millennium CE?

I don’t have the expert knowledge to judge Piketty’s research.   His conclusions seem true to me because they fit in with what I read elsewhere and what i see going on around me.  I do know that initial attempts to disprove his claims have failed; I’ll deal with this in my next post.

I expect that, in the coming years, other economists will come up with different estimates and different charts.  The important question is whether they get different values for r and g, but whether they will be able to show that Piketty’s r > g doesn’t normally hold true or won’t hold true in the future.  We’ll see.

LINKS

Piketty’s Inequality Story in Six Charts by John Cassidy for the New Yorker.

Is Surging Inequality Endemic to Capitalism? by John Cassidy for the New Yorker.

Capital in the Twenty-First Century: Introduction by Thomas Piketty.

Inequality & Capitalism in the Long-Run by Thomas Piketty

Q&A: Thomas Piketty on the Wealth Divide, an interview of Piketty for the New York Times.

Thomas Piketty on capital, labor, growth and inequality, an interview of Piketty by members of the Institute for Public Policy Research.

Why We’re In a New Gilded Age by Paul Krugman in the New York Review of Books

Thomas Piketty Is Right: everything you need to know about ‘Capital in the Twenty-First Century’ by Robert Solow in The New Republic.

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One Response to “Piketty’s inequality argument in six charts”

  1. ebrew79 Says:

    Is it any wonder that so people have risen up to discredit Piketty, particular Big Business and the politicians who are funded by them. The man should be congratulated for pointing out the dire direction we are headed into if we don’t make changes. http://wp.me/p4oODX-1D

    Like

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