Piketty's World Inequality Report is less than it might seem

Whether inequality is increasing or not very much depends upon what it is that we’re trying to measure. Inequalities of lifestyle? Consumption? Income or wealth?

How these are measured also matter rather a lot. And it would appear that the latest attempt, the World Inequality Report and associated work from Thomas Piketty et al is rather less accurate than many seem to assume.

We defer to James Galbraith on this subject - someone we’ve discussed the larger issue with at times. It’s entirely true that our world views don’t entirely coincide but we do agree that facts is facts and that’s where we’ve got to start from. For if we don’t accurately analyse whether there’s a problem at all, nor the causes of it, then we’re just never going to find a solution.

Galbraith’s new paper:

A more interesting claim lies in the focus on national institutions and policies, which is justified by the comment about ‘different speeds’. Differences in the behaviour of inequality over time are indeed evidence that national institutions matter. But if it should appear instead that movements of inequality are correlated across countries, that inequalities move in the same way in neighbouring countries or even across continental distances — that would lead toward a very different view. Namely, it would suggest that global forces tend to drive the movement of inequalities across countries, even if they do not work everywhere with the same force or at the same rate. We shall return to this issue, as work with different data strongly indicates that powerful global macroeconomic currents affect the movement of inequalities, especially in smaller countries and the developing world.

Quite so, international happenings are likely to have international causes. Our own insistence would be - note ours, not Professor Galbraith’s - that integrating billions of excruciatingly poor labour into the global economy would, we would predict, increase inequality by increasing the pressures on low skill labour everywhere. The benefit of this cost being that those excruciatingly poor become less so as economic growth happens. As has been happening these past few decades.

We’d also insist that this is a benefit that is worth the cost of greater inequality.

It’s also, eventually, self-solving as catch up growth reduces that competitive pressure. But the important point to take from this being that if it’s not domestic political decisions causing the rise in inequality then it’s most unlikely to be domestic political action which will reduce it.

The lesson of this paper though is that the evidence base being used to make the wilder claims of inequality growth is, well, that evidence isn’t very good.