What Piketty Misses

By Herbert Grubel of Atlasone. Herbert Grubel is professor of economics (emeritus) at Simon Fraser University and Senior Fellow at The Fraser Institute in Vancouver, Canada. Excerpts:

"Piketty’s voluminous statistics are of limited relevance to his neo-Marxian conclusion about the inevitability of rising inequality, social unrest, and the collapse of existing market economies. The statistics he uses are snapshots of the distribution of income and wealth taken of a population whose composition changes with every picture taken.

What is more relevant to the assessment of the problems he foresees is information that traces the incomes of the same individuals through time."

"The Canadian data will surprise many: Out of 100 workers who were in the lowest income quintile in 1990, 87 had moved to higher income quintiles 19 years later, with 21 having reached the very top quintile. Income mobility also results in downward movements. Of 100 Canadians in the highest income quintile in 1990, 36 were in lower quintiles 19 years later."

"The same Canadian families who had inflation-adjusted average incomes in the lowest quintile in 1990, by 2009 had incomes 280 percent higher. During the same period families in the top quintile in 1990s experienced an increase of only 112 percent. The average incomes of the middle three quintiles rose by 153 percent. These data show that all Canadians have become richer, the poor more so than the rich, and the middle class has more than kept pace with the rich."

"The Forbes data on billionaires shows that only 10 percent of those on the 1982 list were still on the list in 2012, even after adjustment for inflation over the 30 years.

Most of the extraordinary recent growth in the income of top earners — the infamous 1 percent — is due to the growth in the market for their services, which has been driven by the introduction of new electronic media, globalization, and the growth in the incomes of audiences: professional athletes, creative artists, and entertainers now reach millions rather than the hundreds who used to fit into arenas or the thousand in movie theaters.

The globalization of commerce has increased the size of firms and raised the dollar value of the contributions managers can make to their bottom lines. A firm with domestic sales of $100 million can offer a top manager expected to raise sales by 1 percent less than it can pay after globalization raises this same firm’s sales to $10 billion. The earnings of Bill Gates and Steve Jobs and their top managers would have been much smaller if their innovations had been sold only in the United States rather than throughout the world.

Piketty used the wrong data in concluding that the rich are getting richer and the poor are getting poorer. Dynamic income statistics show that all are getting richer, the poor more so than the rich. He also wrongly attributes most of the growth in wealth inequality to excessive savings accruing to the rich when in fact it is due to recent technological revolutions and the globalization of business that benefits super-managers and innovators-entrepreneurs like Gates and Jobs."