I wrote in a column recently of “the fawning, obnoxious adoration heaped upon Thomas Piketty’s ‘Capital in the Twenty-First Century’.” My criticism of the general reaction to Dr. Piketty’s book does not apply to (most) academic economists, fortunately. An excellent new paper from Daron Acemoglu and James A. Robinson proves the point.
Dr. Piketty argues (among other things) that when the real interest rate (r) exceeds the growth rate of the economy (g) — that is, when r > g — inequality will increase. Why? Because under this condition income generated from capital will grow faster than non-capital income, like wages. Wealth, therefore, will grow faster than take-home pay, the rich will get richer and richer, and we will end up in a world of vast inequality.
Enter Drs. Acemoglu and Robinson:
More important is the empirical success of the fundamental force of r — g in explaining top inequality. The reader may come away from the huge amount of interesting data presented in [“Capital in the Twenty-First Century”] with the impression that the evidence supporting these claims is overwhelming. But Piketty does not engage in hypothesis testing, statistical analysis of causation or even correlation. Even when there are arguments about inequality increasing because r exceed g, this is not supported by standard econometric or even correlation work. In fact, as we discuss in the next section, the evidence that inequality is strongly linked to r — g does not seem to jump out from the data — to say the least.
They estimate some correlations between r — g and the share of income help by the top one percent. They don’t find much evidence to support Dr. Piketty’s hypothesis. In fact, they find more evidence that the relationship is the opposite of what he claims.
Though this evidence is tentative and obviously we are not pretending to estimate any sort of causal relationship between r — g and the top 1% share, it is quite striking that such basic conditional correlations provide no support for the central emphasis of [“Capital in the Twenty-First Century”].
Obviously, this isn’t the last word on the subject. But it does potentially make a contribution towards separating the wheat from the chaff.
There’s much more great economics in their paper, which I encourage you to check out here.
— Michael R. Strain is a resident scholar and economist at the American Enterprise Institute. You can write to him on Twitter at twitter.com/MichaelRStrain.