Update: This post corrects a previous version, which mistakenly located Carmen Reinhart and Kenneth Rogoff’s claims about public debt and GDP growth in their 2009 book rather than a related research paper written later.
Wonkdom is in an uproar over the new book from French economist Thomas Piketty, “Capital in the Twenty-First Century,” and its provocative thesis that the developed world seems destined to growing inequality unless we impose heavy new progressive income and wealth taxes.
There’s a right-left Piketty split (sorry), with conservatives against him and most, but not all, progressives hailing him. Predictably, Paul Krugman of the New York Times considers the book a “masterwork.” Somewhat less predictably, Dean Baker of the Center for Economic and Policy Research notes the book’s obvious allusion to Karl Marx and says “it owes too much to the master, and not in a good way.”
I’m a little late to this party. But plowing through Piketty’s 577 pages left me thinking that a specter haunts both Piketty and his fans — and it is not the shade of Karl Marx.
Rather, it’s the Ghost of Wonky Book Uproars Past, specifically the boom-bust cycle of opinion regarding the authors of another improbable bestseller: “This Time is Different,” by economists Carmen M. Reinhart and Kenneth Rogoff.
Though the focus of their work was the history of financial panics and their aftermaths, Reinhart and Rogoff’s research, presented both in the book and in a subsequent academic paper derived from the same data, resembled “Capital” in important ways.
It featured a pithy statistical headline finding. “Debt burdens above 90 percent [of Gross Domestic Product] are associated with 1 percent lower median growth,” they wrote in a 2011 Bloomberg View column.
At a time of furious debate between fiscal hawks and doves, it was an explosive contention. But it gained credibility because it was rooted in what the two economists described as a vast and previously unavailable data set of their own assemblage, “covering 44 countries for up to 200 years” and “spanning a wide range of political and historical circumstances, legal structures and monetary regimes.”
Piketty, too, boils his conclusions down to a marketable mathematical expression: r > g, which means that, over time, the return on capital exceeds the rate of economic growth and that, consequently, the rich will keep getting richer until the capitalist West reverts to a state of “patrimonial capitalism” akin to Jane Austen’s England.
This conclusion, Piketty explains, derives from the analysis of a vast new cross-national historical database, which he created in collaboration with colleagues, and which permits him (unlike previous authors) to “study the dynamics of income and wealth distribution over the long run.”
Alas for Reinhart and Rogoff, when skeptical grad students reviewed their database and their calculations, they discovered a spreadsheet coding error that undercut their growth-retarding 90 percent of GDP debt threshold. Critics pounced, to the chagrin of not only Reinhart and Rogoff, but also those of us in the punditocracy who had taken their claim at face value.
Like most of Piketty’s other readers, I have no idea whether r > g rests on a similar glitch, though to his credit he has made his raw data available here, and it is undoubtedly going to be scrubbed by scholars, if it hasn’t been already.
I am qualified to say Piketty is batting less than 1.000 when it comes to getting ordinary facts right. As Diana Furchtgott-Roth already pointed out, Piketty claims that the U.S. minimum wage was “increased several times by Barack Obama after 2008.” Robert Kuttner caught him claiming, mistakenly, that, contrary to the French, Americans do not look back fondly on the relatively equally shared post-World War II economic boom.
I picked this nit: on page 82, Piketty says China’s population was “roughly 50 percent” larger than India’s as of the time — “in the 1970s” — China adopted its “one-child” population-control strategy. Well, at the time of the policy’s formal announcement, in 1980, China’s population of 981 million was 40.3 percent larger than India’s 698.9 million, according to World Bank statistics.
In hindsight, Reinhart and Rogoff’s fans should have been more cautious about overstating their debt-growth findings, since existing economic theory didn’t necessarily predict it, and since — even after correcting their calculations — their data still showed a similar, if weaker, tendency. There was no need to hype it.
In Piketty’s case, his blockbuster assertion, that r > g foretells a relentless wealth-inequality spiral, depends on several assumptions whose theoretical basis may or may not be sound. As President Obama’s top economic adviser, Jason Furman, notes in a recent speech, the worst-case r > g scenario might not pan out unless the ability of businesses to substitute capital for labor is considerably greater than economists have so far established it to be.
Thus, even if its numbers are right, the ultimate verdict on “Capital in the Twenty-First Century” might not be all that different from the one on Reinhart-Rogoff’s opus: useful, provocative, hardly revolutionary.
After the Reinhart-Rogoff flap, former Treasury Secretary Larry Summers, an eminent economist in his own right, warned: “Going forward, authors, journals and commentators need to devote more effort to replicating significant results before broadcasting them widely. More generally, no important policy conclusion should ever be based on a single statistical result.”
It was sound advice. But, with best-selling books and media hype, as with financial crises, this time is never really different.