By Ian Talley of the WSJ.
"Thomas Piketty’s case for rising inequality took another hit this week.
Mr. Piketty hypothesized that income inequality has risen because returns on capital—such as profits, interest and rent that are more gleanings of the rich than the poor—outpaced economic growth.
The evidence modern capitalism foments inequality, the former adviser to French Socialist Party candidate Ségolène Royal argued, was in capital’s rising share of income at the expense of labor’s contribution over the last four decades.
But Mr. Piketty’s thesis, posed by the French economist in his controversial 2013 tome “Capital in the Twenty-First Century,” isn’t proved by historical data, says International Monetary Fund economist Carlos Góes.
“There is little more than some apparent correlations the reader can eyeball in charts,” Mr. Góes says in a new paper published by the IMF. “While rich in data, the book provides no formal empirical testing for its theoretical causal chain.”
Mr. Góes tested the thesis against three decades of data from 19 advanced economies. “I find no empirical evidence that dynamics move in the way Piketty suggests.”
In fact, for three-quarters of the countries he studied, inequality actually fell when capital returns accelerated faster than output.
Those findings support previous work by Daron Acemoglu of the Massachusetts Institute of Technology and political scientist James Robinson, now of the University of Chicago, suggesting Mr. Piketty’s thesis was far too simplistic for the complexities of real-world economies that are affected by politics and technology.
Mr. Góes says his study also provides evidence that Mr. Piketty’s assumption that saving rates remain stable is flawed. Rather, the data shows changes in the savings rate are likely to offset most of the effects of an increase in capital share of national income.
Why does all this matter?
Because if policy makers seeking to address inequalities misunderstand the problem, their solutions could be wrong, ineffective and costly. Based on his inequality theory, Mr. Piketty has proposed progressive wealth taxes, a measure some economists argue could harm economic growth.
Mr. Góes says his study suggests, however, “one needs to look for the causes of inequality (and potential solutions) elsewhere.”
5 Takeaways On Wealth and Inequality From Piketty (April 4, 2014)
Thomas Piketty Says Labor’s Share of Income Is Declining, But Is It? (March 26, 2015)
Thomas Piketty’s Focus on the 1% Is a Flawed Measure of Inequality, Paper Says (Feb. 29, 2015)
Piketty Sticks to Wealth Tax Proposal, Sees Positive Signs (Dec. 19, 2014)"