Making Predictions Is Easy — The Hard Part Is Being Right

by Jim Manzi

Ryan Cooper has written a piece in The Week that is highly critical of my analysis of Thomas Piketty’s argument for very high U.S. income and wealth taxes. 

Cooper starts his attack with this:

Jim Manzi at The National Review thinks this deep-sixes Thomas Piketty’s theory of economic history. He argues that Piketty’s main thesis is that top managers have been gaming the compensation system, and therefore confiscatory taxes can be imposed on them without damaging the economy. When it comes to the U.S., the rest of the book, he says, “is just a sound and light show.” Manzi then attacks every aspect of this reconstructed case to show that supermanagers are being unfairly maligned.

This misrepresents what I wrote.  I wrote that with respect to America to date, the parts of Piketty’s book relating to “r > g,” the “reemergence of a patrimonial society,” and all the rest is just a sound-and-light show. I said this because I read Piketty himself as arguing that growing inequality in America has so far been driven by skyrocketing wage income of top managers of large firms, rather than rentiers living off returns accumulated capital.  In support of this, I quoted one Thomas Piketty, who wrote:

Let me return now to the causes of rising inequality in the United States. The increase was largely the result of an unprecedented increase in wage inequality and in particular the emergence of extremely high remunerations at the summit of the wage hierarchy, particularly among top managers of large firms.

That sounds pretty clear to me. 

Cooper (who amusingly next says that he is going to “pretty much ignore” my argument) goes on to summarize Piketty’s broader thesis, and then ends his column with this:

Current income inequality driven by wages, and the extent to which that is driven by hyperpaid executives, is an important question, but simply not a major part of Piketty’s thesis.

So in the end, I don’t think Manzi is justified in tossing all that aside as a “sound and light show.” As Piketty notes in his book, capital income accounts for about a third of the increase in income inequality since 1980, and I see no reason to think that proportion won’t increase. Absent some kind of action, an American future of patrimonial capitalism looks likely.

Of course, this is just a simple assertion that he thinks Piketty’s long-run predictions are reliable. I actually made no claims about whether current income inequality would or would not be converted into future differences in capital ownership by descendants of the supermanagers versus everybody else. That wasn’t my argument at all (though I suppose Cooper should be commended for truth-in-advertising when he said he ignored what I actually wrote).

My argument was that Piketty’s answer to the crucial question of why income inequality has been rising in America to date is wrong. To reiterate, Piketty argues that inequality has increased primarily because top managers of companies with dispersed shareholder bases have gamed the compensation system to seize more value. He therefore concludes – since this is a seizure of value rather than money paid in order to increase company performance — that  the government can tax away these increased earnings with no loss in economic output.

In contradiction to Piketty’s argument, I presented evidence that (1) there just aren’t enough top managers of relevant companies to account for most of the growing incomes at the top; (2) executives of public companies represent a shrinking share of those with top incomes; and (3) Piketty’s description of how top managers have gamed the comp system is extremely naïve and unsupported by strong evidence. 

Why does my argument matter if I have not somehow disproved Piketty’s broader thesis about the long-run tendency of capitalist economies to ever-growing inequality based on accumulation of capital?  Because if Piketty is wrong about the mechanism driving U.S. inequality to date, then his predictions  for the results of his proposed high tax policies are unreliable. Specifically, he has not made the case for his extraordinary claim that the government can implement an 80 percent marginal tax rate plus a global wealth tax with no reduction in economic output.