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Leland Yeager on Thomas Piketty

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Here’s a valuable rule to follow: if Leland Yeager wrote it, it’s worth reading – and reading carefully.  And even though Leland will celebrate his 90th birthday in just four months, he’s still going strong.  Here’s his review of Thomas Piketty’s Capital in the Twenty-First Century [2].  (HT Scott Eden)  A slice:

One might expect concern about inequality to include concern about further concentration of resources and power in the state. However, Piketty does not expect his more drastic and broad-based progressive taxes to raise much more revenue. Nor, perhaps inconsistently with not expecting this, does he worry about damaging incentives to work and innovate. Possibly he agrees with John Stuart Mill in thinking that the distribution of wealth can be separated from its production. Possibly, like José Ortega y Gasset’s Mass Man (The Revolt of the Masses, 1930), he regards the wonders of modern industrial civilization as automatically existing, like facts of nature.

I offer only one small amendment to Leland’s excellent review.  The first sentence of the paragraph immediately preceding the passage quoted above reads: “Nowhere, as far as I noticed, and to his credit, does Piketty blame inequality for economic crises and depressions or commit the crude Keynesianism of recommending redistribution to raise the propensity to consume.”

Uncharacteristically, Leland missed this passage from page 297 of Piketty’s volume (footnote excluded):

Is it possible that the increase of inequality in the United States helped to trigger the financial crisis of 2008?  Given the fact that the share of the upper decile in U.S. national income peaked twice in the past century, once in 1928 (on the eve of the crash of 1929) and again in 2007 (on the eve of the crash of 2008), the question is difficult to avoid.

In my view, there is absolutely no doubt that the increase in inequality in the United States contributed to the nation’s financial instability.  The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms.

This one passage from Piketty’s book – in addition to being factually wrong about the purchasing power of lower- and middle-class Americans (In fact, it did not stagnate.), and in addition to revealing Piketty’s fixed-pie notion of wealth (In fact, increasing income inequality in a market economy does not imply, or even suggest, that impressive income growth for the rich causes income growth for poor and middle-income folk to stagnate.) – is a nest of poor economic reasoning.  See how many of these flaws you can pick out.