Stossel on Picketty

Wednesday, June 04, 2014

Like Harry Binswanger last week, John Stossel comments on Thomas Picketty's Capital in the Twenty-First Century, which is being used to fan "income gap" hysteria. The following point is well worth keeping in mind:

But focusing on this disparity ignores the fact that over time, the rich and poor are not the same people. Oprah Winfrey once was on welfare. Wal-Mart founder Sam Walton was a farmhand. When markets are free, poor people can move out of their income group. In America, income mobility, which matters more than income inequality, has not really diminished.

Economists at Harvard and Berkeley crunched the numbers on 40 million tax returns from 1971-2012 and discovered that mobility is pretty much what The Pew Charitable Trusts reported it was 30 years ago.

Today, 64 percent of the people born to the poorest fifth of society rise out of that quintile -- 11 percent rise all the way into the top quintile. Meanwhile, 8 percent born to the richest fifth fall all the way to the bottom fifth. Sometimes great wealth makes kids lazy and self-indulgent, and wrecks their lives. [bold added]
Stossel elaborates, noting that various government programs purporting to help the poor actually harm them. In particular, he notes that Barack Obama's decision to enforce rules against unpaid internships is helping those disappear. Many of "the poor" had been able to obtain skills vice money that way, enabling them to become better off later. (Two side notes: (1) We can see the Labor Theory of Value at work again, in terms of both a failure to appreciate the value of knowledge and in terms of a fixation on monetary rewards for work. (2) It's interesting to see which laws this Chief "Executive" selectively enforces.)

All I would add to this is that "the poor" also enjoy, thanks to the elements of capitalism in our economy, many things that had not been available at any price in our more ... level ... past. Televisions, smart phones, the Internet, and automobiles come to mind. This is not a criticism of Stossel's piece, which he has to delimit for the sake of readability, but one of the income gap jihadists, who are counting on (or sufficiently blinded by) envy to keep us from noticing what their reforms ultimately put at risk.

-- CAV


Snedcat said...

Yo, Gus, a good roundup of more directly economic articles taking Piketty to task is this post at The Skeptical Libertarian, which is a good group blog. The first review listed cuts to the heart of Piketty's central formulaic nonsense: He reverses cause and effect on a basic level:

A larger problem is that Piketty assumes capital earns some rate of return, r, so the share of income going to capital, α, is determined by the value of capital times the return it earns. This is exactly backwards.

Capital does not have some value, which then earns a return to provide income to the owners of capital. Rather, capital consists of productive assets that generate a return, and the value of the stock of capital is determined by the return it generates, rather than, as Piketty depicts it, the return being determined by its value.

This makes a difference because it misrepresents how capital owners earn their incomes. In fact, capital must be allocated to productive uses in order to generate a return, and the job of the capital owner is to allocate that capital as productively as possible. Successful owners of capital will earn higher returns, and unsuccessful owners may lose their investment altogether, and see the value of their capital drop to zero.

Other reviews in the list show that the income data that everyone trumpets is pretty seriously flawed on a basic level: Confusing taxable income with real income, ignoring the effects of progressive taxation, ignoring lots of unreported income for individuals below the top 10%, using individual rather than household incomes, and so on. And finally, the review in the Financial Times claims to have found serious errors in Piketty's data, formulas, and spreadsheets such that when they are corrected his conclusions are simply not borne out at all. Of course, this will probably have no effect on the lefterati, but at least it's good to have it to hand for bystanders.

Gus Van Horn said...

That's good to know about, in the same way that numerous other leftist tropes are already known to be economic nonsense, but you are right, "[T]his will probably have no effect on the lefterati[.]"

They are more concerned about following their altruistic morality than with the truth, which is the reason Binswanger argues that the whole notion that, "Social distinctions can be based only on common utility," is what ultimately needs fighting.

Gus Van Horn said...

There is more on this point (as it related to the minimum wage) in a post at Voices for Reason that I ran into this morning.