 Welcome to Free Thoughts, a podcast project of the Cato Institute's Libertarianism.org. Free Thoughts is a show about libertarianism and the ideas that influence it. I'm Aaron Powell, a research fellow here at Cato and editor of Libertarianism.org. And I'm Trevor Burrus, a research fellow at the Cato Institute Center for Constitutional Studies. Our topic for today's episode is a book you may have heard something about because it seems like everyone who talks about books like this is talking about this book. And that's Thomas Piketty's Capital in the 21st Century. Joining us today to talk about it is Scott Winship. He's the Walter B. Riston Fellow at the Manhattan Institute. Welcome to Free Thoughts, Scott. Oh, thank you for having me. So a lot of big books on topics like this come out pretty frequently from academics and don't get anywhere near the attention that this one is. So why is Capital in the 21st Century tearing up the charts? So I think first it needs to be said that the book is a really important book and it reflects 15 years of work that Piketty has put into developing all of this economic historical data that really deserves to be lauded. I think Larry Summers has a review out now that says it's Nobel Prize-worthy and I think that's right. But that's not why it's getting all the attention, which is in some ways I think the more interesting thing. It's getting attention because inequality has been such a hot topic in D.C. and to some extent on the Eastern Seaboard ever since Occupy Wall Street, I think. It's been in the news. President Obama made it a big theme of his reelection campaign in 2012 and then even afterwards it was in his second inaugural. The Center for American Progress has started a new think tank that's devoted to inequality so it's been this issue that hasn't gone away. I think it actually will go away, maybe we can get into that later. But his timing was perfect and it also has this veneer of sort of having a scientific explanation for why capitalism is doomed to eat itself that I think is attractive to a lot of folks out there unfortunately. And so that's a big part of it as well, I think. And so you get this, see look, I told you I was right the entire time and that seems to be what a lot of people on the left are saying. We've been talking about inequality and here you go, Nobel-worthy work and then people on the right seem to have to hate it. I think Larry Summers made this observation that it's a very complex book that deserves, as you said, a lot of respect, especially his dad on inequality over the period of time in the story. But it starts to lag at different times, I guess. Is the consensus, something consensus, it's interesting but flawed. I think that's becoming the consensus. You had this interesting dynamic where a few people got a hold of it. It was released in France last year actually. It was floating around out there. A couple people had had review copies. I think I read that Bronco Milanovic, who's at the Luxembourg Income Study in City University of New York, was actually in Europe and founded in a bookstore and ended this actually really good 20-page review of it. So there was a little bit of a buildup where you kind of were hearing things about this important book overseas that's going to be coming out in English. You had a first wave of reviews that were mostly from people on the left and they were kind of these fawning reviews, people tripping over themselves to tell everyone how important this book was. What it did is it set up this reaction where if you are on the right or if you're kind of a skeptic about the importance of inequality and policy as your business, you had to buy the book yourself. It got to the point where pretty much everyone in town who studied income or mobility or topics like that, you sort of had to have a review of the Piketty book. It was almost a running joke, oh, where's your Piketty review? Now I think as people have worked through the 700 pages, which I'm not sure many of those initial reviews that folks made it too far into them, you're getting a more nuanced picture of it. Interestingly, it's a bipartisan nuanced picture in a lot of ways. For a long time you had, I think people like Matt Ecclesius of Vox, he said, what's the conservative response to Piketty? I think the skeptical response to Piketty has actually come from people who are right of center like myself, but also as you mentioned, Larry Summers' review is pretty skeptical. Even someone like Brad DeLong who's an economist at Berkeley, they're trying very hard to sort of criticize, I think, but put it in the best light, but I think a lot of the economic arguments have been shown to be problematic by an increasing number of economists. James Galbraith is another economist who's certainly politically left of center who had some important criticisms. Danny Rodrick, I think at Harvard, has had another similar review. Before we then get into the details of those economic arguments, maybe you can give us the big picture. What is the scope of Piketty's argument? Piketty essentially, most of the book is devoted to laying out these extremely long-term trends in things like wealth as a share of national income and the fraction of income going to workers versus to owners of capital of wealth. That's the real, I think, intellectual contribution of the book. Now, going throughout the length of the book, he weaves in this argument about how capitalism tends to produce ever rising inequality, and so the technical argument is essentially that with low economic growth, that is going to tend to increase wealth as a share of national income. What do we mean by wealth? Right. That's a great question. Assets tend to think of capital as assets, wealth that produce a stream of income pretty regularly. Piketty's definition is a little bit different where he essentially is treating all assets as capital. One of Summers' critiques is that in the United States, the biggest form of wealth is actually owner-occupied housing that generates a stream of income in the sense that people who own their home benefit from the shelter that it provides where they would be paying rent for it if they didn't own the home. But it's a little bit of a different way of thinking about capital as economists tend to talk about it. So for Piketty, wealth is essentially any asset that folks own. Not just a machine that produces something but anything. That's right. Yeah. Housing is wealth, retirement savings in theory as wealth. And so what Piketty shows is if you assume that savings rates are just set that they don't respond to things like economic growth or wealth concentration. The percentage of how much you're saving of your income for some time period. That's right. The amount of annual income that you save and invest. And so assuming that doesn't change depending on how good the economy is? That's right. So the big assumption that there is- That seems like a big assumption. Yeah. No, and that's the first of a number of big assumptions. So yeah, he kind of takes the savings rate as just this thing that's out there that isn't affected by the other moving parts in his theory. And if you accept that, then lower economic growth in a country will tend to, will mathematically produce more wealth as a fraction of national income. So I mean the intuition is if you're saving the same amount over time but economic growth is slower then savings are going to build up and wealth is going to build up and it will become a bigger share of national income. Now, most of us I think would say, well, if wealth is becoming a bigger fraction of national income that's not necessarily a bad thing, it sort of sounds like a good thing if a country is getting wealthier. Piketty even worries about that actually, that having more wealth for the amount of income that you have. Even if inequality in wealth or in income isn't growing, that that somehow is a dangerous thing. So he kind of has a little bit of an anti-consumption, you're a little bit too rich for your own good type of- Yeah. He uses this language about it could be socially disruptive and it's a really interesting kind of skepticism and wariness from him, I guess. But so then the next piece of the argument is if wealth as a share of national income is growing and the return to wealth doesn't fall, then what that will do mechanically is it will increase the share of income that's going to capital, to wealth holders, to non-workers, although people can be workers and own wealth at the same time. And so there's the second big assumption, right? As wealth as a fraction of income rises, Piketty says that the return to wealth won't fall correspondingly. Economic theory tells you that as wealth rises, as assets accumulate because of diminishing returns, the return to assets should decline. If you've got- if everyone some day owns their own robot or something, then the value of the next robot is going to shrink and actually labor workers will become relatively more valuable for production than robots are. So wait, let's go back a little bit because I'm not an economist and many of our listeners are. So I'm going to try and imagine this, the thesis here. I think it's very important to understand it in a more applied nonabstract way. So a guy owns a factory. So Rich Guy, that's a product of capital. And so he gets wealth, that's an item of wealth that people- and he has workers who work on the machine and he makes money off of that mostly through the value that he gets as a capitalist, correct? And so the workers get a wage and they're not getting anything on the return on the capital. Because the wage is not wealth. It's income. Yep, that's right. Yeah, so human capital, kind of the amount of investment that you do in yourself and your skills, that's not counted as wealth in the book. And so the idea is that he will increasingly get the capital, the factory owners and everyone like that will increasingly get more money from that while the wages themselves stay pretty stagnant and therefore they will become richer while everyone else is about the same. That's right. And the key assumption is that the value to an owner of a factory or the owner of a robot or some machine that's producing a stream of income for the person that owns it, that that doesn't become any less valuable as capitalists accumulate more and more stuff. So if you've got one factory- The factories start to break down, don't they? They do and Piketty uses a lot of net concepts which account for depreciation for the fact that you've got to replace stuff and that's part of the problem with this economic argument that I think Summers points it out pretty well. But yeah, the idea is if you've got one factory that has a rate of return of 4% or something, you get another factory that's going to have a 4% rate of return, you get a thousand more factories, each of them is going to have a 4% rate of return. That assumption has been challenged by a number of economists and I think rightly so. But those returns just keep going and keep going and keep going. That's right. Yeah. Theory would predict that as capital accumulates, as assets accumulate that the return will decline and you'll sort of reach a new equilibrium where the rate of return is lower. Because of this weird definition of wealth, Summers I think is great on this. If you think of owner-occupied housing again as a form of capital by Piketty's definition, the income that's produced from the house that you own, as I said, is really not income that lines your pockets. It's sort of money you would have had to spend if you were renting. That doesn't get reinvested in any way. No one's trying to consume it. Exactly. You build a new wing of your house from the income stream that you... You're saved by not having to pay a renter in an alternate universe. Exactly. Right. So if you assume that the returns to wealth don't diminish as wealth accumulates, that's mechanically going to send more national income to owners of assets rather than to workers. And in turn, because capital income, the income that comes from owning wealth, is more unequally distributed than labor income, that's going to increase income inequality. So you've got more income going to capital instead of to workers. You've got more income going to the richest income earners rather than the poorest income earners. And by the way, unless everyone who owns wealth spends it all, if they reinvest any of it, then wealth inequality will also increase over time. Sort of a snowball effect. That's right. Yeah. So it's an inequality triple whammy. It's sort of a perfect storm, which I think is part of the appeal for folks on the left who are trying to get people to really be worried about inequality. It's an account for why in every way we're just doomed. You just published a cover article in the national review about this and the cover image is of Karl Marx. Holding a Starbucks coffee, I believe. It's like a millennial Karl Marx. The shirt that says still wrong, right? It's a good picture. And so a lot of the rhetoric around Piketty is this is like neo-Marxism. And so that seems to be why people are saying that might be why it's so appealing to people on the left who are Marxists all along and other people are using this as a way to attack him. But is it accurate? Is this Marxism repackage or is this something totally different? So it's an interesting question. When I started initially working on the piece, I was inclined to certainly not play that up at all because he's from France. I don't think actually we've mentioned that as a French economist. He's very clearly in the social democratic mode for Europe, well to the left by American standards. But I sort of thought, well, I don't know how fair it is to talk about this as Marxism. Although it depends on I think what your definition of Marx is. So for your philosophically inclined listeners, he does really give credence to Marx's view that there are these contradictions in capitalism that will push capitalism towards essentially self-destruction. And he says that Marx was wrong. But the reason that Marx was wrong is that he couldn't foresee that economic growth would essentially boom kind of right after actually capital came out. And Piketty now is saying, but now actually we're in a period where growth has slowed and so his arguments become more applicable today. So philosophically, I think he does have this sort of neo-Marxist perspective about capitalism politically. He's gone out of his way to kind of say he's not a political guy. I'm just an academic economist. I think it's at all academics describe themselves as whether it's accurate or not in any one case. But in 2007 he was a prominent advisor to the presidential candidate of the French Socialist Party who I think shares a kid with the current president of France who's a member of the Socialist Party. He's pretty active in politics back in France. So I think it's pretty fair. The policies he's arguing for are pretty extreme. The one that's gotten the most attention is a global wealth tax, which he acknowledges is not very practical, but he thinks this is the sort of thing that will save capitalism from itself. But he also has this proposal for an 80% top income tax rate, which he would apply to income over $500,000. So a good chunk of doctors in America, that tax rate would bite into what they make. So I think it kind of is a fair charge. His collaborator, Emmanuel Saez is an economist at the University of California, Berkeley. Another guy who potentially both these guys are going to win a Nobel Prize for their inequality work. But it's pretty clear that he also, I don't know anything about how radical his politics are. I suspect they're not incredibly radical, but he's certainly an advocate for the view that inequality is essentially a modern-day crisis that we've got to do something about it. And I've seen him present presentations where the last slide sort of says, unless Americans can essentially be educated about how much inequality we have, they'll never worry about it. And I thought that was just an incredibly revealing slide because he and Piketty are kind of in the business of education in a sense of telling people how much inequality we have and how it's worsening, but not interestingly why we ought to care about any of that. In your overview you just gave us, you raised a lot of problems with the assumptions he makes in his model, but before we start, we'll talk about all those issues and your criticisms of him. But before we do that, what did he get, what does he get right? What's, even if all that is wrong, is there still, what in the book is worth reading or Nobel worthy? Yeah. So just the amount of work and creativity and brilliance that has gone into assembling these very long-term trends. So in France he's got trends going back to the 18th century on things like the amount of wealth as a fraction of national income in a country, in the share of income that's going to capital or to workers. So that's a major accomplishment, the income inequality figures. Probably until about 2000, whenever anyone talked about inequality in the United States and most other countries, the best we could do, we kind of had this measure called a genie coefficient, which essentially compares every possible pair of people, compares their incomes and measures the overall level of income inequality in a country. But it turns out that the major story since the 1970s has actually been the extent to which the very top, the top 1% and actually even the top one-half of the top 1%, the extent to which they've, income has become concentrated at the very top. And we just didn't know much about that at all until Piketty and Saez came along and started assembling these tax return-based estimates of income inequality. So they did it for the United States, Piketty did it, had done it for France before that, and then with other economists around the world, they've actually done it for I think a couple dozen countries. So a real contribution to the field, a number of them are also working on wealth concentration figures, which interestingly, the ones that Piketty sites actually contradict the idea that wealth inequality is growing in the United States. So all of this work in putting together these series has involved a ton of work working with this tax return data, digging up archival sources, and it really is, I would agree with Summers that it is no bell worthy. That's correct. I mean, I think that there is a lot of pushback, especially this idea that the super rich are pulled away from the incredibly rich to a higher degree than in the last three decades and ever before, that the 1% or even the 0.1% that they're making more money than they ever made before. I think that's right. I mean, interestingly, one of my big critiques of their work is about their income concentration data. And I don't dispute that income concentration has risen, but I think probably their data overstates how much it's risen by quite a bit. I know less about the 18th century French wealth-to-income ratios. I suspect that those ones are probably on more solid footing. And at any point does he – and this is something that comes up about inequality in general, does he sort of seem to assume it's a bad thing? Does he ever come out and be like, just per se, because this is the great question that people on the right have a discord with people on the left when you say there are people who believe that rich people should be brought down even if it doesn't help poor people out. Just by itself, that would be a good thing to diminish some people's well-being just because they're doing a little bit too good compared to everyone else. Does he ever seem to address that issue? No. I mean, it's striking because this book is 700 pages long and to the extent that he talks about why rising inequality is something that we ought to be concerned about, it's mostly in the context of being socially disruptive. He talks about it as a threat to democracy in a lot of ways, but sort of really in just kind of armchair – Can you big that up for me? Yeah, exactly. I don't know your uncle. So yeah, it's interesting. It's not sort of grounded in literature or kind of reviewing evidence, which I've spent quite a bit of time doing. It's just kind of assumed that, well, of course, we ought to be worried if income concentration is higher than it's ever been. He spoke at a few events in Washington, D.C. for a week that – or a few events around the country for a week that he's in the United States. The one that I attended was at the Urban Institute and I thought there was an unintentionally hilarious tweet that I think Tim Noah was an MSNBC writer tweeted, which said something like, is it just me or is Piketty looking incredulous that his American audience keeps asking about why we should worry about inequality? I think that's right. I think it's sort of a strange question for him to receive. For him to receive. In France, he probably doesn't get it that much. And I think I had heard that he had never left France before this trip or something like that. Yeah, so he had definitely bragged about how little he had left Paris. So not even France. He sort of – Wow. Yeah. And in the book, he has a little vignette about his – he was at MIT for a little while and he sort of talks about how he didn't really like it there. He didn't like American economists. And it's funny. You're sort of, I think, seeing the scorn returned in some ways in some of the more recent economic critiques of him. What does the literature say on this? Because this idea that there is something – that income inequality is destabilizing as bad for democracy is one that I think a lot of people do hold even if they're not as concerned about it as Piketty might like them to be. Does the literature support that? Does it contradict that? Do we know? I don't think we know. There hasn't been a ton done on it. So the American Political Science Association, which is the professional association for political scientists in the U.S., put out a report, I think it was 10 or 12 years ago, where essentially they said, you know, we don't know the first thing about how inequality is related to political or democratic outcomes. And since then, there's been some more work. There are studies that have looked at the extent to which the policy preferences of voters who are middle class or poor or rich, the extent to which those preferences are reflected in votes. And there are a couple of those studies that have found that legislators are more responsive to the preferences of the rich. However, you know, there's another major study, a book that was funded by the Russell Sage Foundation, which is, you know, a pre-left-of-center foundation does fantastic work. But this book essentially failed to replicate it. Its primary conclusion was, you know, it's hard to find the policy – the differences in policy preferences between rich, middle class and poor. Yeah, there's pretty much none the last time I checked this out. Yeah. They're very – they're similar and they don't always go the way that you might expect. It's not necessarily the case that rich people are more anti-welfare, for instance, than middle class people. The other interesting line of research that you see and gets cited a lot is – there's a book by Darren Asimoglu and James Robinson called When Nations Fail. That's about inequality and democracy. But it focuses on sort of developing countries and merging markets. And even they, you know, the Center for American Progress had them over to talk about their book and they've tried to extrapolate this argument about often non-democratic countries that have a lot of inequality that we ought to, you know, draw lessons from them about why inequality is bad in places like the United States, which I think is ludicrous. It also seems like they're making comparisons, you know, like to make comparisons to gilded age type of thing or even maybe Piketty would do pre-French Revolution, aristocracy, and this is exactly why it's problematic. Yeah, yeah. But it might not be – that's the question that I'm asking. It seems to me that the first obvious answer for why the 0.1 percent would be pulling away are world markets. Yeah. I mean, you can sell an iPod to everyone. Yeah. And that would mean that originally, when Americans were the only people who had afforded that in 1955, you could make a lot of money but not that much money. But now you can make an amazing amount of money. That would be a first answer. And the market's gone from hundreds of millions to billions of – Yeah, that's right. So, on both those points about Piketty kind of harkening back to French Revolution stuff. Yeah, French Revolution and early labor strife, you know, Chapter 1 of the book starts out with a contemporary account of a minor strike in South Africa where there was violence. I think there were some workers that actually were killed. And essentially, it pivots from this and says, you know, is this what the future has in store? He talks about Haymarket Square and wonders, you know, whether we'll see a return as inequality rises back to those earlier levels, whether we'll see a return to the sort of labor strife without any recognition that as a nation, we're something like 10 or 12 times richer than we were back then. I mean, there was a reason why labor was so much more popular back then and why people were willing to, you know, face private security guards and even take bullets in some cases when there was a lot more poverty than there is today. Today, we're, you know, one of the richest nations in history. I think our middle class is at something like the 95th percentile of world income according to Bronko Milanovic's stuff. So there's this real absence of context. Well, that makes it seem with the Marxist point because I know Piketty has said that I like capitalism. I think it has many good things in trying to sort of get people to stop paying attention to the Marxist comparisons. But this fatal flaw thing, you know, I don't think Marx would have said himself that he hates capitalism. He just said it would have been a—it was divorcing workers from their value and there's going to be a comeuppance if you kept divorcing people from their value and they will revolt. Yep. And so if he opens up the book with the discussion of workers' revolt, he's definitely putting himself more into this classic Marxist camp that something in capitalism is going to spin out of control and then they come up in the doomsday. That's right. And it's so striking because he follows up this discussion of, you know, invoking labor violence with a review of these early economists who made these sweeping predictions about the future and who just completely got it wrong. So Marx, who he does show that he was—he can't deny he was completely wrong but also you know, Thomas Malthus, David Ricardo, he kind of goes into detail about these grand theories these guys had and what, you know, we can draw from them the whole time acknowledging that they were just badly off and then making, you know, this other grand argument himself. It's kind of like, wow, it's a fair amount of hubris to think, well, these guys, Ricardo and Marx got it wrong but maybe I'm going to get it right. In your article, you go through a fair number of ways you think he misinterprets data or that the data that he chooses leads in potentially an inaccurate direction. I was wondering if you could go through some of those because I was struck by there were quite a lot of them. Yeah, so my biggest critique of his data relates to his income concentration figures and so for instance the numbers that everyone cites because they're the most striking of the various charts that he has show that the share of income received by the top 1% rose from 10% in 1980 to 24% in 2007. More than doubling, pretty dramatic increase, that series, excuse me, has a number of problems with it and I would say kind of in, we'll work up to some of the more technical ones. The most basic problem is that this is all income derived from tax returns. If income isn't taxable and doesn't show up on tax returns, then it doesn't show up in their data. What that means is that transfers, for instance, whether it's things like unemployment insurance, means tested programs like welfare, food stamps, that doesn't show up in the data. More importantly, social security and Medicare don't show up in the data. His data isn't broken out by age so what's happened since 1980, well we've seen the boomers age and retire and so we're seeing an increasing share of the population that doesn't have earnings, that they rely on social security. They may receive retirement benefits which do show up in the data although in lumpy ways that probably overstate how much income concentration there is. Right off the bat, you're making invisible to the data the main way that we actually try to mitigate inequality in the country. That's also true of taxes. We have progressive taxation whether you like it or not. It is a way that we deal with inequality. All of their figures are before taxes are taken into account. Another problem with their data is that the basic unit they're looking at is not a household and it's not an individual person, it's a tax return. What that means is that if I'm a 16-year-old kid who works at a fast food restaurant for the summer or after school during school year, I file my own tax return. I show up in the data as a pretty low-income tax return. Similarly, if I'm a college student and I have a work-study job and file my own tax return, so you end up padding the data with a lot of lower income, what I think is taken as lower income households, but which are actually a lot of them are just dependents who have to file their own tax return. So those are some of the more basic problems. There are all these technical issues too around measuring income, in particular capital gains. So if you have an asset that you've owned for a while and then you sell it, the capital gain is the difference between what you sold it for and what it was originally worth when you bought it. Or you can experience a capital loss as well if it declines in value. The way to think about income that you receive from assets that you own is that kind of year by year you're getting a stream of income, right? Whether you actually see it in the form of a check or cash depends on if you've sold it or not. But really, even if you haven't sold the asset, it is income that's accruing to you behind the scenes. So if I've owned a home, let's say that I bought a home in, I don't know, on 14th Street and you and here in Washington D.C. right after the riots that happened after the Martin Luther King assassination, housing would have been pretty cheap in that neighborhood back then today. If you were sitting on that housing and sold it, you'd do very well. The way that would show up in the tax data is as this gigantic lump sum that you received last year. So it wouldn't show up as kind of, well, I earned a little bit in 1969, a little bit in 1970 and over 40 years it added up. You see essentially the whole 40-year gain show up in one year's tax return. So that obviously makes income concentration look steeper than it is if the folks at the top who own more assets than others are timing it, depending on how the stock market is doing, which is a very clear pattern that shows up in the data. It's going to make things look even more dramatically higher over time. And then finally, as if that sort of wasn't enough, if you're say a middle class homeowner and you sell your home but the capital gain isn't big enough to be taxable, which generally is and I think has to be above $450,000 or something like that for a married couple, the gain, not the selling price, then that doesn't show up in the data at all. And so essentially you're counting more than you should all these capital gains at the top and you're not counting any of the capital gains that middle class households are experiencing from selling homes. If they have 401ks and they're kind of slowly building a nest egg, that's all behind the scenes until they cash out at retirement. So the way that they treat capital gains also has the effect, I think, of overstating how much income concentration has grown. And then there are some other technical issues around stock options and corporations, whether corporate income shows up on individual tax returns or on corporate tax returns, depending on how tax policy changes, income pops up in different years in different places. And I'd be remiss if I didn't say the person who's really, I think, done the most on all of this is Cato's own Alan Reynolds who's really done important stuff on all this. Was that, I guess, my question then is someone listening to this could say, well, given all of these problems that you've raised and all of these complexities that they seem to have ignored, that they were cherry-picking their data, that they chose the way to measure that would lead to a picture of a scenario that they liked, but on the other hand, this sounds like measuring this stuff and taking into account all of that would be fantastically complicated. And so is it that they didn't do the right thing or that it would really be close to impossible to do the right thing to get the data to really get a meaningful picture out of all of this? Yeah. I think it's too soon to say that it would be impossible. It certainly will be challenging to deal adequately, I think, with the capital gains issue in particular. And I don't think there was anything nefarious in what they've done. They've made a few changes, a small number of changes in response to criticisms in the past. So for instance, originally they were using a cost of living adjustment that no academic researcher these days that does stuff on income trends. If they know what they're doing, they don't use it. It's essentially the adjustment that's used for federal policy to kind of update tax brackets to update federal benefits. There's no reason that would track very well with the real world. Yeah. And it's pretty well known that it overstates inflation, which then understates how much incomes have grown over time. So in response to criticism, they did switch to a different cost of living adjustment. So it's not that they've refused to acknowledge any problems or make any changes. But I will say, I do think they've been poo-pooing a little bit some of the criticisms that I think are really important, both from Alan Reynolds and also Richard Berkhouser, who's an economist at Cornell University who's done, I think, the best work so far tackling this capital gains issue. So what Berkhouser did was to take a household survey and link it to a second household survey that had much better wealth measures. And so they knew from the survey the asset portfolio that everyone had and they took the returns that were typical of different types of assets and essentially assigned them to people as income. So whether or not they sold the asset or not, they just gave them what the typical return in the previous year was. And interestingly, when they did that, they found that rather than income concentration growing between 1989 and 2007, it actually fell. Now I think it's too soon to say that that's actually what happened, that income concentration didn't grow at all. But I don't think it's at all too soon to say that his results strongly suggest that the way they're treating capital gains is overstating the rise in income concentration over time. It also seems like people can manipulate, if you're using tax returns, you've talked about some of them, but there's a lot of ways you can manipulate your tax return in ways, American charitable deductions. And there's a cap on that, but Americans in particular are far more charitable than Europeans. And so if you're just looking at that, it's really hard to see the income, I would say. That's right. And Alan's one of his major points is that whenever tax policy changes, and you have some years where there are these huge changes, like in 1986 and other years where there are smaller changes, but when you have that much money, the incentives to figure out how to game the system in perfectly legal ways so that your income doesn't get taxed, you've got strong incentives to do that. You can shift stuff between taxable so that you're receiving instead of taxable interest, you're receiving tax-exempt interest on, say, municipal bonds, something like that. You can change the type of stock options you get so that there are taxes capital gains or they're not taxes capital gains. There are a million games like that you can play. Not to mention things like hiding money offshore and actual illegal tax avoidance. I think Alan's got some really important points. But that would have theoretically, if you're mostly trying to avoid taxes, I assume you're probably not trying to overstate your income, then it would maybe mean that the actual inequality is higher unless the middle class are doing that too or lower class than the really, really super rich. Yeah, I think the issue is whether the changes that have happened since 1986, for instance, have caused a lot of money that was invisible, that was kind of hiding behind the scenes for, I think Alan would say, even maybe for decades. So when top tax rates were 90% or 70%, it may be that a lot of the top 1% of the top 1% simply had company cars, a lot of perks that didn't show up on tax returns. If you go further back to sort of the days of FDR, there were, I think, all these issues around trusts. Like the Pew Charitable Trusts where I worked once, which is a great organization, but you did have a lot of these trusts that people set up as a way of shielding their income from taxation. So Alan's argument is that essentially what's happened since 1986 is that you've had a lot of tax policy changes, just including lower marginal rates that have caused more money to show up on... But people were richer in the past than people seem to think. Yeah, interesting. Exactly. You've given us a lot of reasons to doubt these conclusions, especially the predictions that he has for where capitalism and capitalism in the United States is going. But even if the scenario isn't as dire as he seems to think it is, if there's anything right to it, if it is the case that more and more of the wealth is getting concentrated in certain sectors and the wages aren't keeping up, is that troubling? Is that something we should be concerned about? I mean, what would be the negative effects, even outside of just like, well, income inequality would increase, but we've already done the kind of so what on that? Yeah. So I mean, I think there are two possible arguments that you can make if you're concerned about inequality. I think one is just a normative argument. You can just say that's not who we are. No one should make more than $500,000. It doesn't matter if they're in some objective way worth it. We just don't think that it's right. If you've got poverty in the world, then you shouldn't have people that are making as much as our top 1% are. That's fine. But I think that's not the argument that you hear from the left. And I think partly because it's not all that widely shared, I think, in the United States. I think people are pretty tolerant of people like Steve Jobs, Mark Zuckerman. LeBron James. LeBron James, for sure. Oprah. So that's not the argument that people make on the left. The argument that they instead make is a consequentialist one. And I think that's where they trip themselves up because most people aren't familiar with the research on this stuff. So I had a piece of national affairs about a year ago. I spent several months reading the literature on whether inequality affected mobility affected middle class incomes, affected economic growth. In my book, Mobility, you mean people's ability to rise up through. Yes, I'm sorry. That's right. Upward mobility from the bottom, whether it affected democracy, whether it affected financial stability. And what I found time after time was either the literature is A, mixed. And I think that's how I would characterize literature on economic growth. There are studies defined that more inequality hurts economic growth. There are studies defined that more inequality helps economic growth. There are other areas where I would say the literature is just bad. So that would be my characterization of literature on inequality and economic mobility, upward mobility. It's tended to be basic correlation. So there's this thing called the Great Gatsby Curve that Alan Kruger presented at the Center for American Progress. He was President Obama's Council of Economic Advisers chair, which basically showed that across countries, if you have more inequality, you have less upward mobility. And, you know, they used this to argue that since inequality is rising in the United States, that mobility was going to fall. And it was just awful evidence. Kruger is one of the smartest economists out there. And it was just this ludicrous argument. And you do see a lot of stuff like that where people say, well, inequality has grown over time. And also, this other thing we don't like has grown over time and the two must be related. It's like, well, a lot of things have changed over time. So I really don't think in any of these areas there's much evidence that we ought to be concerned about the consequences of rising inequality. One of the reactions I got after I wrote that essay was interesting from a pretty prominent think tanker in town whose name I will not mention. But this person said, well, you know, I disagree with what you found. But to really, you know, answer you, I'd have to go and read all that literature. Don't make me go read all this stuff. That's what you'd have to do. But you also have these ideas that inequality is bad for your health. And then maybe what Piketty is thinking if we, you know, like his first chapter or the first thing in his book is that people are just going to get really upset about this. And they're going to revolt. They're going to look at the world and be like, no longer are we getting our fair share and no people are. And that's what we should be concerned about. Yeah. And I think that's the danger. And that's why I push back on a lot of the stuff to the extent that I do. I think it wins me fewer friends and more enemies. But the danger is that that will do something to reduce inequality that will really end up hurting us. If you had an 80% tax rate on incomes above $500,000, I think you would see innovation dry up in the United States. It's almost zero. You have no venture capital whatsoever. Absolutely. And so I think I sort of closed my review, my essay in the National Review this way. You have this weird certainty on the left. So my arguments generally are not of the variety that says it's absolutely the case that I know there's no reason to worry about inequality. It's to say, look, you look at the evidence and if you're trying to prioritize issues, there's absolutely no reason that you would put inequality first. Whereas on the left, you have this certitude. You have this idea that we've got to do something about this. It's the defining challenge of our time. If we don't, all these bad things are going to happen to the extent that there are costs to reducing inequality. They're small and we can live with them. And it's just this complete lack of imagination, I think, about respect for what we don't know. David Brooks has this great column from a few years ago, I think, on epistemological humility or something like that. And I think that's really the stance that we all have to take with some of this stuff. If we overshoot and do something that could be harmful, that's not going to help the middle class or the poor or mobility or economic growth or democracy or any of that. So I see my own role as trying to rein in some of these arguments. And I think as the economy continues strengthening, I think the fascination with inequality, at least among the broader population, I think is going to diminish. Probably not in D.C., unfortunately. Thank you very much, Scott. For our audience who's listening and maybe has more questions or wants to follow up with you, where can they find you online? Yeah, so I'm on Twitter. My handle is at Swinsheet. It sounds like my Swedish alter ego. It's S-W-I-N-S-H-I. And I'm at the Manhattan Institute. And our research center here in Washington, D.C., is called Economics 21. We've got a website there. Thank you for listening to Free Thoughts. If you have any questions or comments about today's show, you can find us on Twitter at Free Thoughts Pod. That's Free Thoughts-P-O-D. Free Thoughts is a project of Libertarianism.org and the Cato Institute. And it's produced by Evan Banks. To learn more about Libertarianism, visit us on the web at www.libertarianism.org.