The 75% of the world’s population not covered by Piketty

In between grading exam papers I have been wading through the Piketty book.  Its a bit like walking through a muddy field.  The going is sometimes a bit stodgy, but you eventually get there.  There have been many reviews and commentaries on the book – one of the best I think is by Debraj Ray (http://debrajray.blogspot.co.uk/2014/05/nit-piketty.html ), who also wrote what I believe to be the best textbook on Development Economics in 1998, which, alas, I don’t think was ever updated.

Ray is sceptical about Piketty’s “Fundamental Laws of Capitalism”, but believes that the book makes a major contribution in highlighting the concentration of top incomes, arising from both an increasing share of income accruing to capital and also the phenomenon of very high returns to human capital at the top of the wage distribution.

All of this I am sure is very familiar to readers of this blog – Piketty’s must be one of the most reviewed economics books of the last 30 years.  But what seems to get less coverage is what has been happening to the approximately 75% of the world population not covered by the Piketty book.  A recent World Bank study by Lakner and Milanovic (covered here in Vox http://www.voxeu.org/article/global-income-distribution-1988 ) shows that over the 1988-2008 period, growth for the bottom 75% of the world (with the exception of the very bottom 7% or so) has been well above average, thus contributing to an overall compression of the world income distribution.  There have basically been three broad changes in world income distribution over the last 30 years.  Yes, the top 1% have seen high growth, while those between about the 75th and 99th percentiles have done relatively poorly – these are the phenomena covered in Piketty.  But the vast majority of the bottom 75% have also done relatively well, particularly those just above the median – effectively the Chinese and Indian middle classes are catching up with lower income groups in the OECD countries.  The net effect of these three changes is a fall in overall world income inequality.  The data stops at 2008 but my guess is that developments since then have probably only accentuated these trends.  And further globalisation is likely to have the same effect.

The piece finishes off with some speculation about the political implications of all this, which I am not quite so convinced by.  But overall, given that inequality seems to be flavour of the moth these days, it is interesting to get a more global view.

Comments

comments

26 thoughts on “The 75% of the world’s population not covered by Piketty”

  1. Chapter 12 deals with global inequality. I take it you haven’t got that far? If the exam papers you are grading make Piketty seem stodgy by comparison then you are very fortunate in your students. As economists go I’d say Piketty is one of the best writers I’ve ever encountered.

  2. Kevin, you are right, I am only halfway through the book and have not reached chapter 12 yet, but a quick glance at it suggests to me that Piketty does not cover (in any detail anyway), the type of issues raised in the Vox report.

    As regards the writing style, I guess a lot of it comes down to taste, but I do think the book could have been better edited. There is also a translation issue, I guess.

    I won’t comment on my students’ exam papers!

  3. I think it’s best not to take Piketty completely literally at every point in his book. He quite openly does some hand-wavey stuff, and occasionally makes generalisations that are probably not true in every case, but it seems to me that’s more a style thing to cover a big territory in a way accessible to a general audience than a genuine flaw.

    And yes, while it’s an easy read, it is awfully long relative to the core content.

  4. @ David Madden

    Not read it yet, your honour.

    What you’re saying there seems to be the line Greg Mankiw and Ken Rogoff are taking, that is, never-mind the growing inequality in Western Capitalism – see how Capitalism is bringing wealth to the world!

    Not sure about Picketty but this would come as no surprise to Marx or Hobsbawm. Capitalism, based on:

    (a) Individual alienable property rights, and
    (b) enforceable contracts

    will be a massive generator of wealth at the expense of, inter alia:

    (a) traditional societies/cultures,
    (b) rural populations,
    (c) the environment,
    (d) nonrenewable resources

    and tend towards the creation of mega-cities.

    I think what the ‘capitalism is basically good so let’s all go back to sleep’ line misses is:

    (a) the destruction of the environment
    (b) the destruction of democracy
    (c) the longterm entrenchment and increase in inequality
    (d) The flattening of human experience into a, ‘Starbucks is good’ mode, which probably mr paul quigley has some ideas about.

  5. @ Gavin

    (e) how sustainable is it all ?
    (f) dumping all the externalities onto society is poor form
    (g)metrics are not good enough

    I think the India numbers on people lifted out of poverty are dubious enough too. And India has something like half of the world’s poor.

  6. ‘But the vast majority of the bottom 75% have also done relatively well, particularly those just above the median – effectively the Chinese and Indian middle classes are catching up with lower income groups in the OECD countries.’

    I’ve actually heard this trotted out as a defense of the status quo (I’m not claiming you’re doing this David) i.e. an implied connection suggested between the concentration of wealth/income inequality in the OECD and the rise of Chinese (more so)/Indians(less so) out of poverty.

    The question: Is there any use to anyone anywhere to the status quo levels of income (undisputed)/wealth(disputed) inequality?

  7. What David has highlighted is relevant to the inequality debate in the West as the benefits of globalization in raising a huge number from dire poverty – it’s not all sunshine just like the industrial revolution – has given huge market power and wealth to a new elite of robber barons.

    It cannot be a good thing that 5% of US consumers account for 40% of consumer outlays or that real income of a typical US household in 2012 was lower than the 1989 level.

    With the global market workforce having doubled to 3bn, what is inevitable is dissension in Western democracies as the social models that developed from the 1950s become hard to maintain in an age of low growth while an international transient elite remains immune to the pressures.

    The elections in Ireland and elsewhere provide a foretaste of change when once durable loyalties to parties evaporate.

  8. This is fair enough, but (I ask in good faith) what does this have to do with Piketty’s argument ? I agree (broadly, from my laymans view) that globalisation and increased trade has been good for a large portion of the worlds poor, but it doesnt negate Piketty’s argument, or say anything against trying to tackle inequality in the developed world (without hampering growth in the developing)

  9. Is there a suggestion by the author that increasing inequality in the West, is justified by the benefits of less inequality in the East?

    The Irish Times has a report on just how far inequality of earnings has gone in the West.
    “At that rate an employee would have to work 257 years to make what a typical S&P 500 CEO makes in a year.”

    http://www.irishtimes.com/business/sectors/financial-services/ceo-pay-in-us-jumps-past-10-million-for-first-time-1.1811120?page=1

  10. Curious that according to the Sciences Po critique referenced by Ray the main driver of capital returns is housing and if one removes house price appreciation Pikkety’s thesis falls down. A book called ‘house price inflation and the return on capital’ doesn’t have the same ring.

  11. Perhaps it went over my head but that blog post seemed awfully silly. The rich might have a higher to propensity to save apparently. Might. Anyway, lets move quickly along. A small farmer has capital in the form of land but does he charge himself enough for the use of it to increase his capital faster than his income from produce? No! I rest my case. (Am I wrong in saying that Ray is also a fan of microfinance which I seem to remember is now not so hot?)

    Anyway by the time I read the phrase “human capital” for the fourth time I had developed an intense (and possibly entirely irrational) dislike for Mr Ray and a little googling turned up the delightful “Poverty and Self-Control”. Give the abstract a read and see if you can avoid your jaw clenching. Lets just say “In short, poverty perpetuates itself by undermining the ability to exercise self-control.”. If only they would save enough to buy a few AAPL shares. Remember when the great depression undermined everyone’s self control?

    One paper does not make the man and I know this might seem ad hominem but I think that Ray’s attack on Picketty might be motivated by more than just an urge to clear up some popular misconceptions.a

    Have I got the man wrong?

    p.s. Useful rule of thumb – People who uses the phrase “game theoretical” in an unironic fashion have theories that apply to a world exclusively populated by people who use the phrase “game theoretical” in an unironic way.

  12. “inequality seems to be flavour of the moth these days”

    I knew you were no fan of inequality, David, but I didn’t know it left such a bad taste in your mouth!

  13. I haven’t read the Piketty book but I have followed the data on inequality over a decade that he produced with his compatriot Emmanuel Saez, of the University of California–Berkeley.

    We know that folks who believe in a god because their parents told them about her hard work over seven days, demand concrete evidence when it comes to climate change and anything else that conflicts with their world view.

    At the other side of the spectrum, the main mistake that Rogoff & Rheinart made was to put a figure of a sovereign debt ratio of 90% of GDP as a red alert level rather than their Excel error – but then it’s not news to say high debt is a risk.

    The FT reacted in tabloid fashion on Friday evening tweeting on its ‘scoop’ and saying that access to its story was free.

    However the FT story lacked data for its claim that inequality in the UK hadn’t increased since 1970 and as Paul Mason has pointed out, official data on wealth excludes many key issues.

    Whatever the reason for Piketty going solo, he did say at the weekend that even though there were issues about his US data, data produced by Prof Saez and Gabriel Zucman, of the London School of Economics, another Frenchman, and published after his book, supported his claims.

    Marty Feldstein, President Reagan’s chief economic adviser in The Wall Street Journal took issue with the practice of comparing the incomes of top earners with total national income. “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.”

    I’m putting Prof Feldstein’s views here as an example of the reaction from the moderate right – in the current Republican Party, Ronald Reagan would be a moderate.

    Piketty’s theoretical analysis starts with the correct fact that the rate of return on capital—the extra income that results from investing an additional dollar in plant and equipment—exceeds the rate of growth of the economy. He then jumps to the false conclusion that this difference between the rate of return and the rate of growth leads through time to an ever-increasing inequality of wealth and of income unless the process is interrupted by depression, war or confiscatory taxation. He advocates a top tax rate above 80% on very high salaries, combined with a global tax that increases with the amount of wealth to 2% or more.

    His 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 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.

  14. Articles like Chris Giles are making the FT abo worth the pay.

    Sure, they have the war mongerers and Anglo/ American arrogants on the payroll too.

    But:

    Izabella Kaminskaya deconstructed the Gold sell/buy recommendations from Soros as just talking his book.

    All those idiots doing Soros biddings via INET and trying to dress up as representing the interest of the working class.

    Gavyn Davies ridiculed the fancy multiplier calculations of “IMF chief economist” Olivier Blanchard, driven by political attacks on European core treaty principles, just like his boss, Lagarde never stops.

    I understand now better, why some people fought his friend Peter Diamond getting into the Fed.
    .
    The hubris of this academic sandbox MIT is just breath taking.

    My Angela summed it up pretty precisely:

    http://www.ft.com/intl/cms/s/0/c57e3974-e5ed-11e3-a7f5-00144feabdc0.html#axzz32lOCsruS

    “Not keeping within the lines of the treaty has brought us to the abyss and almost to a compete catastrophe,” Ms Merkel said, a clear reference to the three-year-long eurozone crisis.

    All this stupid little criminal ilk, who constantly try to twist the law, steal, and try to make up for it with racist hate mongering.

    Chris Giles outed Piketty as the French socialist party hack, who cherry picks on inconclusive data to drive a weird agenda. Piketty has certainly NOT discovered any kind of fundamental law. He makes some money with his garble, and that is it. Soon to be forgotten.

    We are not impressed.

    Next year our nagging on stability pact rules will get more serious, and we will see what comes after Hollande, Cameron, Obama, and whether Renzi with his 41% does a Rienzi

  15. Wonder what would Picketty make of this:

    Just to take a few examples of the “no alternative” agenda: was there really no alternative to the following cuts that afflicted most the most disadvantaged communities (this was in the context of public expenditure cuts across the board being just 7 per cent)?

    Sports council –23 per cent

    Family support agency –33 per cent

    Probation services –36 per cent

    Drugs programmes –37 per cent

    Cosc (violence against women) –38 per cent

    Voluntary and community organisations –42 per cent

    Youth organisations –44 per cent

    Community development – 44 per cent

    Women’s organisations – 48 per cent

    Voluntary social housing –50 per cent

    Sports grants – 60 per cent

    Migrants support – 66 per cent

    Rapid (urban community development) – 80 per cent

    Rural community development – 100 per cent

    Travellers programmes – 80 per cent.

    http://www.irishtimes.com/news/politics/sinn-f%C3%A9in-will-follow-labour-s-footsteps-into-government-and-compromise-1.1811574?page=2

  16. @Michael Hennigan

    Marty “efficient markets” Feldstein is well to the right of Genghis Khan.

    He punts for the bigg BIGG health insurance companies and others. He has been well and truly bought – yet is influential – and in the ontologically challenged neo-positivist academic circles – and a gatekeeper intent on sidelining progressives.

    To increase his blood pressure – simply mention ‘The Medical Card’!

    @all

    Blind Biddy is in Tripoli – Libya; on a flying visit.

    Sarkozy has a lot to answer for ….

  17. In general, an exponential function takes the form, b to the power of x: where “b” is the base and “x” is the exponent* – our most obvious example being Compound Interest. The Permagrowth economic paradigm is another. The rate of consumption of fossil fuels another.

    And if those little dears were not interesting enough, then their double first cousin where the value of the exponent, “x” , is itself increasing with time, is a real dilly. The former produces some quite ‘interesting’ outcomes, but the latter (its an accelerating exponential) provides a quite startling outcome. I think this is where Piketty is at. And as for the so-called critics. Tom-cats pi**ing on corners comes to mind.

    You have to ‘take-your-hurry’ until those trend-lines starts to inflect toward their maxima. Not long, not long. Meantime: Carpe diem folks!

    David, thanks for that dismal list. Quite shocking. I do not expect that any ‘Free Market’ enthusiast will comment, in a genuine negative manner, on the on the multiple ‘riggings’ of that market. I mean, how does one ‘rig a free market? “Its, er, impossible – its a Free Market, silly!” Riiiiiiight!

    * http://en.wikipedia.org/wiki/Exponential_function

  18. @David O’D
    Your finest contribution to this forum.
    It takes my breath away. The only consolation is that FG are digging their own grave.
    Sinn Fein in Kerry are seen as first being honest and second being principled. I do not see them combining with FF or FG for the same old, same old. Having said that I would not ignore the fact that they have the same DNA and float in the same culture as all of us. It would take a third term in Gov’t to know whether honesty and principled behaviour are deeply engrained.

  19. Francis
    Piketty has.responded in quite considerable detail showing that the only hack is the FT

  20. Branko Milanovic (economist specializing in inequality, ex of the world bank, follow him on twitter @BrankoMilan) has a response to Debraj (who he is on friendly terms with) and it is harsh but fair, which is to say it’s very harsh:

    http://glineq.blogspot.ie/2014/06/where-i-disagree-and-agree-with-debraj.html

    Among the words Milanovic successfully avoids using are “silly”, “absurd” and “detached from reality” but he does allow himself an “ahistorical”.

  21. Sam,

    I might have missed it in the book of Piketty, I bought and read, and in his subsequent, now numerous, statements,

    but where exactly did Piketty show in “quite considerable detail” verbatim yours, but without any link from yours, that

    Chris Giles claim that piketty’s claim of increasing wealth inequality is just based on cherry picking of incombatible data sources, might be wrong?

    I dont see it.

    To further your understanding, I do not claim the opposite, I just dont see the evidence, and I dont fall for rumour mongering.

    Sam,

    to repeat it, slowly, patiently,

    where did Piketty show what ? with clear evidence?

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