The FT Digs in on Piketty

May 26, 2014

Given the responses of many respected sources, Chris Giles' review of Piketty's data has raised some relevant questions about methods and potential errors, but the consensus seems to be that the claims he made were well overstated. (I'm far from being an economist, so I'll stay out of that fray.) Given the near consensus response to Giles' article, I was surprised to see the FT double-down this morning. Here's a bit of that article wherein Martin Feldstein, Harvard economist and President Emeritus of the National Bureau of Economic Research, expressed his concerns with Piketty's work:

(Piketty's) “claim of the inevitable increase in inequality in all countries rests on a false theory of how wealth accumulates in a market economy.” Prof Feldstein argued that the concentration of wealth had been exaggerated in Prof Piketty’s analysis because it did not take into account the wealth individuals had for their retirement, including their social security and health benefits, and the income that would come from employer-provided pensions. He also took issue with Prof Piketty’s estimate of the increased income inequality in the US, saying it was “based on a flawed interpretation of US income tax data”. For Prof Feldstein, the French academic fails to recognise the impact on reported taxable income of the changes that have occurred in US tax rules since 1980.

I'm stepping out on a limb here, but I can't see how including pensions (an endangered species) would disprove Piketty's argument, unless professor Feldstein believes that the additional risk of the massive shift from defined benefit, to defined contribution plans, will be rewarded by an ever-growing economy. If so, is that realistic?

He also criticised the analysis for omitting government transfer payments such as social security and food stamps which, he said, ”constitute a large and growing share of the personal incomes of middle- and lower-income households”.

I'm dumbfounded by this statement, and I think the programs discussed ought to be looked at independently. We should expect Social Security outlays to go up as our population ages, but is it reasonable to believe that social security checks are staving off inequality in an environment where hedge fund managers can make billions of dollars in a single year? The experts will address the numbers, but on its face, this seems ludicrous. Then there's the claim about SNAP benefits. The Supplemental Nutrition Assistance Program (SNAP), referred to as food stamps until 2008, is a hunger relief program. It helps those in poverty avoid malnutrition and starvation. How in the world does one equate those payments to equality of outcomes? They are going up because a greater number of Americans are struggling to survive in an era of high unemployment, as well as underemployment. Having some of the food you need provided for you does not equate to equality. The mental gymnastics required to arrive at that perspective are at once impressive and appalling. If you think the folks in the A SNAP program are living in the lap of luxury, please take a look at this Center on Budget and Policy Priorities post. But maybe these charts from the same will suffice.

I'm scratching my head on this analysis. If this is the best attack the FT can muster to derail the Piketty train, then I'd say the jig is up. Again, I'm not an economist, so there may be gaping holes in my thinking. If you disagree with my take, please tell me where I'm wrong.