Sunday, 25 May 2014

Talking About the Things that Matter

The big fuss in the wonksphere over the last 48 hours has not been the aftermath of the UK local elections. Contrary to the febrile build-up and the claims of post-poll angst ("Miliband told to raise game" was particularly chortlesome), the results were both unsurprising and reassuring about the sanity of the electorate: Labour did OK, the Tories not so, the LibDems are the walking dead, and UKIP's domestic vote has probably peaked. Despite the best endeavours of journos and spin-doctors, there's really not much to see here: move along now, please.

The bigger fuss has been the reaction to the FT's "debunking" of Thomas Piketty's analysis of rising inequality. According to Chris Giles, Piketty's conclusions "do not appear to be backed by the book’s own sources". I'm not going to go into a detailed analysis of the fisk itself, not least because there will be a tidal wave of more expert interpretations on the way, but I do want to look at the political aspects. In other words, the choices made by Giles in his interpretation of what is wrong and why it matters, and the cacophonous wonk-spasm this has triggered. Most of the errors Giles highlights are just noise, mistakes in transcription or the smoothing of incomplete data series, which have no material bearing on the overall picture or conclusions.

The two key charges are that Piketty has cherry-picked his data sources, specifically for relative UK wealth since the 1970s, and that he has incorrectly averaged European data series. This leads Giles to conclude that "wealth inequality has not been rising in the last 30 years in Europe" and that this is "a fundamental challenge to Prof. Piketty’s thesis that all advanced economies have been witnessing a turnround in a long historic trend of falling wealth inequality after 1980". Let those statements boggle your mind for a moment or two. The context is that Piketty is trying to measure wealth over the long run, which is complicated because it takes many different forms (property, shares, bonds etc), much of it is hidden offshore, data sources are inconsistent and discontinuous, and the numbers since 1980 are heavily skewed by property values, which for the "middling sort" is wealth that is more apparent than real.

The politically salient point is the focus on the "richest". In other words, Giles is pleading the case that the rich have not accelerated away from the mass of the population. Inequality is relative, so you could challenge Piketty either by claiming that the rich are poorer than we think, as Giles does, or that the poor are richer. Some of the less adroit right-wing commentators and windup artists have attempted the latter ("you've all got flat-screen TVs and smartphones, you whiny bastards!"), but the evidence of stagnating wages, commodity deflation and a buoyant payday loan market makes this a tough one outside of a tabloid column. It's hard to convince people that they were wealthy all along when you've spent the last 5 years deploring high levels of household debt and insisting that we all tighten our belts. Even rising house prices, which were once seen as a symptom of general prosperity, are now seen as a baleful sign of rising inequality for "generation rent".

The chief problem with the "rich not so rich after all" thesis is that it requires us to believe that the neoliberal programme since 1979 has been an abject failure in its own terms. Its public and unashamed goal was to stimulate greater inequality - i.e. the just desserts of entrepreneurial risk-taking and innovation - which would in turn lead to higher aggregate growth and thus a beneficial trickle-down for all. The rising tide would lift all boats, even if this meant allowing a few super-yachts in the harbour. In fact, growth has been only so-so, and lower than in the preceding 1945-78 period. What has indisputably happened is rising income inequality, which has been driven by technical change and globalisation (automation at one end and skill/network effects at the other) and exacerbated by tax policy. We also know that rising income inequality fuels capital growth, due to the higher marginal propensity of the rich to save and the encouragement of pro-capital tax regimes (e.g. executive stock options). On top of all this, there is no doubt that offshore wealth has grown far faster than GDP since the lifting of capital controls in the 1970s and 80s.

Giles's second charge is that using a simple average (i.e. an average of averages) to illustrate the aggregate European inequality trend across three countries - the UK, France and Sweden - is misleading. According to Giles: "it gives every Swedish person roughly seven times the weight of every French or British person. Using an average weighted by population appears more sensible". This is debatable. A weighted average makes sense if the datasets are consistent, i.e. you could mix them up without affecting the individual data points. But it is problematic when doing international comparisons of a relative measure within a country, such as wealth inequality, which is heavily influenced by national factors, such as taxes on wealth, tax morale/avoidance and rates of home-ownership. This is a problem that has long bedevilled the use of Gini coefficients, which tackle the similar, but much easier, task of measuring income disparities.

The implicit question is whether a poor person in the UK is comparable with a rich person in Sweden, and the answer is both yes and no. Clearly, translated to a common scale (e.g. Dollars), the Swede is wealthier than the Brit, but inequality as experienced daily is a measure of that Brit's wealth relative to other Brits, not to Swedes. Someone on a  comfortable income in the UK will feel uncomfortable buying a round in a Swedish bar. Sweden started with lower levels of inequality than the UK and France in the 70s, but it has converged on the same levels since. This means it has seen a faster rate of growth in inequality over the period, which explains why Giles is keen to under-weight it at the aggregate level.

The significance of Giles's two charges is that once you massage the UK increase in inequality away (through the heroic assumption that Thatcher and her legatees failed to reverse the progressive gains of the 60s and 70s), and dilute the Swedish impact, the European trend largely disappears due to the much smaller increase in France. In other words, the over-nationalised, high-tax regime of those cheese eating surrender monkeys proves that inequality isn't rising. Ironic, no?

It might appear as if the Piketty reaction has now reversed all the way back to stage 1, denial, however I think this is still a species of bargaining. The right largely gave up trying to defend rising income inequality as just desserts and necessary incentives after 2008. The casino has partially shut, so the immediate priority is making sure you hang on to your winnings. Giles's claim is that accumulated wealth is not a problem: "wealth concentration among the richest people has been pretty stable for 50 years in both Europe and the US". This is why conservatives have started to warm to the idea of taxes on capital income and estates as preferable to a wealth tax. If Piketty's r > g formulation is correct (the return on capital will normally exceed GDP growth), modestly taxing returns can still allow for capital growth, whereas taxing wealth might lead to a gradual erosion of the capital base if income did not cover the tax bill in years of depressed returns.

Some right-wing commentators have gleefully thrown Reinhart & Rogoff into the mix. Sauce for the goose, and all that. In reality, this is a misunderstanding of the R&R debacle, which was less about their claims than the deliberate abuse of their data by politicians who had already decided on austerity and were looking for academic credibility. R&R's mistake was to posit an iron law: when public debt exceeds 90% of GDP, growth is suppressed. The correction of their spreadsheet error revealed that there was no iron law, and that there was more evidence of reverse causation (i.e. low growth drives up the debt ratio). That should have been more of an embarrassment for the politicians than R&R, but by then the damage was done and austerity embedded. In Piketty's case, none of the claimed errors have such a dramatic impact (at best they weaken a tendency), as those well-known lefty publications the Economist and the Washington Post have noted, and no mainstream politician has come remotely close to constructing policy on the edifice of the Frenchman's work.

Piketty's basic contention is that inequality tends to inexorably increase in a capitalist economy due to r > g, and that the 1914-1970 period of falling inequality was the exceptional product of massive capital destruction and subsequent public investment, rather than the natural evolution posited by the Kuznets curve. This isn't a novel idea, but Piketty has provided the most detailed study to date in support of it, and other studies are now reinforcing his findings. The forward implication is that inequality will inexorably rise once more, short of a world war or deliberate redistribution. This will remain a compelling argument even if the growth in inequality between 1979 and today is shown to be weaker than Piketty claims (NB: nobody is claiming that inequality is still falling). The Frenchman's offence is not data manipulation or incompetence, but having the temerity to focus on accumulated wealth.

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